TELEPHONE  RATES  AND  VALUES 


TELEPHONE 
RATES  AND  VALUES 


By 
CHARLES    W.    McKAY,    M.E. 

'1 

CHIEF  APPRAISAL  ENGINEER,  MCKAY  &  SHERMAN, 
CHICAGO  AND  NEW  YORK 


THE    CORNHILL   PUBLISHING   COMPANY 
BOSTON 


A]  3 


Copyright,  1921,  by 
THE   CORNHILL   PUBLISHING    COMPANY 


Printed  in  the  United  States  of  America. 


CONTENTS 


PAGE 

Chapter  I.  —  Commission  Form  of  Public  Utility  Regulation,       ...         1 
Chapter  II.  —  Appraisal  Terms,         ........         8 

Chapter  III.  —  Determination  of  Fair  Value 17 

Chapter  IV.  —  Direct  Construction  Costs,  ......       29 

Chapter  V.  —  Collateral  Construction  Costs,       ......       35 

Chapter  VI.  —  The  Non-Physical  Assets, 54 

Chapter  VII.  —  Preliminary  Steps  of  Inventory,          .....       67 
Chapter  VIII.  —  The  Inventory  of  Real  Estate  and  Equipment,  .          .       73 

Chapter  IX.  —  The  Outside  Plant  Inventory, 81 

Chapter  X.  —  Inventory  of  Miscellaneous  Equipment,          ....     101 

Chapter  XI.  —  Preliminary  Discussion  of  Unit  Costs,  .          .          .          .105 

Chapter  XII.  —  Unit  Costs  for  Real  Estate  and  Equipment,         .          .          .108 
Chapter  XIII.  — Unit  Costs  for  Pole  Lines,        .          .          .          .          .          .114 

Chapter  XIV.  —  Unit  Costs  for  the  Aerial  Cable  Plant,        .          .  .122 

Chapter  XV.  —  Outside  Wire  Costs 128 

Chapter  XVI.  —  Conduit  Costs,        .  .  ...     135 

Chapter  XVII.  —  Underground  Cable  Unit  Costs,       .  ...     138 

Chapter  XVIII.  —  Miscellaneous  Unit  Costs,      .  .  .145 

Chapter  XIX.  —  Depreciation,  .  .          .  .149 

Chapter  XX.  —  The  Function  of  the  Appraisal  in  Rate-Making,  .          .186 

Chapter  XXI.  —  Telephone  Appraisement  by  Short  Methods,      .          .          .    222 


445261 


TELEPHONE  RATES  AND  VALUES 


TELEPHONE  EATES  AND  VALUES 


CHAPTER  I 
COMMISSION    FORM    OF    PUBLIC    UTILITY   REGULATION 

1.  Early  Supervision  Over  Dispensation  of  Public  Necessities.  — 

The  subject  of  commission  control  of  the  corporations  whose  function  is  to 
supply  the  public  with  light,  power,  water,  intercommunicating  and  trans- 
portation facilities  is  one  that  is  deservedly  gaining  widespread  notoriety. 

At  the  time  of  the  inauguration  of  the  commission  form  of  utility  regu- 
lation, a  comparatively  few  years  ago,  there  was  a  reasonable  doubt  in  the 
public  mind  as  to  whether  the  large  expenditures  essential  to  the  establish- 
ment and  maintenance  of  public  service  commissions  could,  in  the  long 
run,  be  justified.  That  this  doubt  has  been  largely,  if  not  entirely,  dis- 
pelled will  not  be  questioned  by  one  who  has  had  the  good  fortune  to  live 
in  a  community  where  public  utilities  are  subservient  to  competent  com- 
mission control. 

The  regulation  of  business  enterprises  by  local  or  general  government 
is  not  by  any  means  a  new  departure,  although  the  present  form  of  com- 
mission control  originated  with  the  establishment  of  the  Massachusetts 
Board  of  Railway  Commissioners  in  the  early  60's. 

As  early  as  the  thirteenth  century  the  English  government  exercised  a 
more  or  less  rigorous  supervision  over  the  dispensation  of  public  necessi- 
ties. Naturally  the  commodities  with  which  our  present  commissions  are 
chiefly  concerned  —  i.e.,  gas,  electric  light,  telephone  and  railway  service 
—  were  non-existent  at  that  time,  and  the  government  confined  its  activi- 
ties principally  to  the  regulation  of  private  enterprises  supplying  the  public 
with  foodstuffs,  tobacco,  ale  and  kindred  commodities.  Curiously  enough, 
these  articles  are  exempt  from  commission  control  at  present.  This  is  due 
largely  to  the  fact  that  the  competitive  system,  perpetuated  in  this  coun- 
try by  the  enactment  of  the  anti-trust  laws,  insures  moderate  prices  and 
reasonable  service. 

2.  Forerunner  of  Modern  Commission  Control.  —  One  branch  of 
the  early  English  regulation,  however,  may  be  regarded  as  a  forerunner 
of  our  modern  commission  control.    An  act  of  Parliament,  establishing  a 
uniform  tariff  for  boatmen  on  the  River  Thames,  stipulated  that  schedules 
of  rates  should  be  posted  in  public  places,  and  that  eight  of  the  boatmen 
should  be  elected  to  serve  as  inspectors,  reporting  violations  of  the  law  to 
the  mayor  of  London  and  board  of  aldermen,  acting  as  a  commission  to 
settle  complaints. 


RATES  AND  VALUES 

About  the  same  time  another  act  of  Parliament  provided  for  the  estab- 
lishment of  a  schedule  of  wagon  freight  tariffs,  relegating  the  necessary 
authority  for  the  enforcement  to  the  county  judicial  authorities. 

Later,  in  our  own  country  during  colonial  times,  prices  of  foodstuffs, 
liquors  and  tobacco  were  regulated  by  law.  Some  attempt  at  further 
utility  supervision  is  evidenced  in  the  enactment  of  colonial  laws  pre- 
scribing the  adoption  of  "fair  charges"  for  various  classes  of  mechanical 
work. 

3.  Underlying  Reasons  for  Abandonment  of  Early  Regulative 
Attempts.  —  It  is  interesting  to  follow  the  reasoning  underlying  the 
abandonment  of  these  early  attempts  at  government  regulation  and  their 
reincarnation,  after  a  lapse  of  many  years,  in  the  form  of  the  modern 
utility  commissions.     In  the  early  days  business,  in  European  cities  at 
least,  was  limited  to  a  comparatively  small  class,  —  the  tradesmen  or  small 
shop-keepers,  upon  whom  the  upper  and  lower  classes  were  dependent  for 
the  necessities  of  life. 

The  upper  classes  looked  down  upon  business,  while  the  lower  classes 
had  neither  the  means  nor  the  education  to  permit  their  participation.  As 
a  result,  the  commercial  class  was  not  large,  competition  along  the  various 
lines  of  trade  was  not  keen,  and  the  tradespeople  were  inclined  to  make 
the  most  of  the  situation  by  boosting  prices.  This  in  time  caused  a  retali- 
ation on  the  part  of  the  upper  or  ruling  classes  in  the  form  of  legislation 
providing  for  the  regulation  of  retail  prices. 

As  time  went  on,  scientific  discovery,  as  evidenced  by  the  printing  press, 
steam  engine,  telegraph  and  telephone,  opened  the  way  to  larger  oppor- 
tunities in  the  commercial  world,  and  "trade"  developed  into  "business." 
The  opportunities  presented  attracted  the  brain  and  intellect  of  the  upper 
classes,  and  increased  educational  facilities  permitted  an  influx  from  the 
lower. 

Every  line  of  business  and  manufacture  felt  the  stimulus  of  competition, 
with  the  result  that  prices  were  more  or  less  automatically  regulated,  and 
the  need  for  strict  governmental  supervision  of  the  retail  prices  of  commod- 
ities, such  as  clothing  and  foodstuffs,  diminished. 

4.  Later-day  Demand  for  Governmental  Regulation  of  So-called 
Public  Utilities.  —  In  the  meantime,  however,  the  public  had  been 
becoming  more  and  more  dependent  upon  another  class  of  utilities  more 
or  les.s  monopolistic  in  their  nature,  which  at  first  had  been  regarded  as 
luxuries,  —  railroads,  electricity,  gas,  the  telephone  and  the  telegraph. 

If  a  man  is  dissatisfied  with  a  pair  of  shoes  he  may  easily  change  his 
dealer  or  obtain  any  one  of  a  dozen  or  more  other  standard  makes.  If  he 
receives  poor  service  from,  or  is  charged  exorbitant  rates  by,  the  car  com- 
pany that  carries  him  from  his  house  to  his  office  he  cannot  change 
to  another  line,  or  at  least  not  without  considerable  inconvenience  to 
himself. 


PUBLIC    UTILITY    REGULATION  3 

Hence  the  need  for  definite  governmental  or  commission  regulation  of 
the  class  of  utilities  to  which  the  street  railway  corporations  belong,  the 
so-called  public  utilities. 

5.  Function  of  Public  Utility  Commissions.  —  In  general,  the 
function  of  the  public  utility  commissions,  as  typified  by  the  commissions 
in  the  States  of  New  York,  Wisconsin  and  Massachusetts,  may  be  de- 
scribed as  the  supervision  and  regulation  of  the  following  classes  of  com- 
panies operating  within  the  boundaries  of  their  respective  States:  — 

(a)  Railroad,  —  steam  and  electric. 
(6)  Electric  light,  heat  and  power. 

(c)  Gas. 

(d)  Water. 

(e)  Telephone  and  telegraph. 
(/)  Express. 

(0)  Warehouse,  grain  elevator  and  dock. 

6.  Scope  of  Commissions'  Work.  —  The  scope  of  the  work  of  such 
commissions  may  be  summarized  under  the  following  headings:  — 

(a)  Supervision  and  regulation  of  the  service  rendered  by  utility  com- 
panies. 

(6)  Regulation  of  the  rates  charged  for  service. 

(c)  Supervision  of  the  issuance  of  securities. 

(d)  Establishment  of  uniform  accounts  and  reports. 

(e)  Regulation  of  capital  expenses. 

7.  Supervision  and  Regulation  of  Service.  —  The  supervision  and 
regulation  of  service  is  undoubtedly  one  of  the  most  difficult  tasks  a  com- 
mission has  to  face.    The  reasons  for  adequate  standards  of  service  are 
obvious. 

The  so-called  utilities  have  become  such  an  important  factor  in  our  daily 
lives  that  the  slightest  deviation  from  the  accustomed  standards  becomes 
not  only  a  source  of  annoyance  to  the  utility  patrons,  but  in  some  cases  a 
serious  menace  to  the  community  at  large.  It  therefore  devolves  upon  the 
utility  commission  to  determine  the  highest  degree  of  efficiency  which  may 
reasonably  be  expected  of  the  various  utilities,  and,  having  once  determined 
adequate  service  standards,  to  insure  their  proper  maintenance. 

The  commission's  work  in  this  field  includes  the  inspection  and  periodic 
testing  of  electric  meters  to  insure  the  maintenance  of  pre-determined 
service  standards;  tests  of  the  heating  quality  of  gas;  investigation  of  the 
quality  .of  service  rendered  by  telephone  companies,  noting  especially 
delays  in  completing  subscribers'  calls,  errors  on  the  part  of  the  operators 
in  giving  wrong  numbers,  and  deficiencies  in  transmission.  In  the  case  of 
water  companies,  —  pressure  tests  for  insurance  of  proper  fire  protection; 
tests  of  meter  accuracy;  and  the  determination  of  the  quality  of  the  water 
supplied  for  domestic  purposes. 

8.  The  Regulation  of  Rates.  —  The  regulation  of  rates  is  probably 


4         TELEPHONE  RATES  AND  VALUES 

the  most  complicated  problem  encountered  by  commissions,  and  usually 
involves  an  appraisement  of  the  property  under  consideration. 

Rates  that  are  too  high  or  that  are  unjustly  discriminatory  are  obviously 
undesirable.  On  the  other  hand,  rates  that  are  too  low  may,  and  usually 
do,  in  the  long  run  militate  against  the  general  welfare  of  the  community. 
-When  the  rates  are  inadequate  for  the  proper  maintenance  of  the  plant, 
poor  service  inevitably  results. 

The  function  of  the  commission,  therefore,  is  to  collect  all  the  available 
data  as  to  cost  of  service,  cost  of  maintaining  the  plant  in  proper  condition 
for  supplying  adequate  service,  the  cost  of  the  physical  plant,  and  the  cost 
of  establishing  the  plant  as  an  operating  entity.  With  all  of  this  informa- 
tion at  hand  the  commission  may  determine  a  proper  return  to  the  inves- 
tors for  the  use  of  their  capital,  and  a  rate  scale  that  will  insure  such  a 
return. 

9.  Supervision  of  the  Issuance  of  Securities.  —  Another  duty  of 
the  utility  commission  consists  of  the  supervision  of  the  issuance  of  stocks 
and  bonds  by  the  various  utility  companies.    The  securities  of  well-regu- 
lated utilities  have  gamed  widespread  favor  during  the  past  decade  as  a 
field  for  popular  investment. 

Such  a  condition  is  advantageous  both  to  the  utilities  and  to  the  public. 
It  establishes  a  closer  bond  of  sympathy  between  the  companies  and  the 
general  public,  and  at  the  same  time  provides  a  more  lucrative  field  for 
the  small  investor. 

Obviously,  then,  the  financial  operations  of  the  utility  companies  should 
and  do  have  the  careful  supervision  of  the  regulatory  bodies.  Overcapital- 
ization is  not  only  a  serious  menace  to  the  investor,  but  often  results  in 
an  excuse  for  poor  service. 

10.  Establishment  of  Uniform  Accounts  and  Reports.  —  Intelli- 
gent supervision  of  public  utility  activities  by  public  service  commissions 
is  necessarily  predicated  upon  a  system  of  accounting  that  lends  itself 
readily  to  analysis  by  the  commission's  experts.    To  this  end  most  of  the 
State  commissions  have  devised  uniform  accounting  systems  for  the  vari- 
ous types  of  utilities  falling  under  their  jurisdiction. 

The  initial  step  in  this  direction  was,  however,  taken  by  the  Interstate 
Commerce  Commission,  and  the  accounting  instructions  enforced  by  the 
various  State  commissions  are  of  a  necessity  founded  upon  the  extensive 
accounting  systems  prescribed  by  the  Interstate  Commission. 

11.  Regulation  of  Capital  Expenditures.  —  The  regulation  of  capital 
expenditures  is  by  no  means  the  least  important  function  of  public  service 
commissions.    It  will  be  readily  seen  that  indiscriminate  duplications  of 
plant  —  such,  for  instance,  as  the  extension  of  an  electric  light  company's 
plant  into  a  territory  already  adequately  cared  for  by  a  rival  company  — 
will,  in  the  long  run,  prove  a  burden  upon  the  community  and  of  ques- 
tionable benefit  to  companies  involved. 


PUBLIC   UTILITY   REGULATION  5 

To  quote  Halford  Erickson,  former  chairman  of  the  Wisconsin  Railroad 
Commission:  — 

There  is  one  more  field  in  which  the  commission  has  an  important  function  in 
promoting  the  highest  efficiency  and  lowest  cost  of  public  utility  service.  This  is 
in  the  prevention  of  duplication  and  waste  in  the  establishment  and  extension  of 
both  railway  and  municipal  utility  plants.  It  is  recognized  by  the  railroad  and 
public  utility  laws  of  Wisconsin  that  public  service  corporations  are  in  their  nature 
monopolies,  and  that  the  interests  of  the  public  are  best  conserved  by  protecting 
monopoly  in  these  industries,  and  at  the  same  time  supervising  and  regulating 
them  in  the  public  interest.  To  carry  out  this  purpose,  competition  among  public 
service  companies  in  the  establishment  of  new  lines  and  plants  is  prohibited 
except  under  such  conditions  as  make  its  existence  a  benefit  to  the  public. 

By  keeping  fairly  close  rein  on  the  investment  of  capital  where  another  invest- 
ment has  already  been  made  for  the  same  purpose,  and  at  the  same  time  per- 
mitting such  extensions  and  even  duplication  as  will  result  in  the  greatest  devel- 
opment of  profitable  business  and  the  widest  diffusion  of  needed  services  among 
the  public,  the  commission's  regulation  of  capital  expenditures  is  capable  of  pro- 
ducing very  beneficial  results  to  investors  and  a  permanent  advantage  to  the 
consuming  public. 

12.  Purposes  of  Determination  of  Value  by  Commissions.  - 

From  the  foregoing  synopsis  of  commission  activities,  the  importance  of 
uniform  and  dependable  methods  of  ascertaining  the  value  of  public  utili- 
ties will  be  apparent.  In  general,  it  may  be  said,  that  the  object  sought  in 
the  appraisement  of  such  properties  is  the  determination  of  " value"  for 
purposes  of  — 

(a)  Rate  regulation. 

(6)  Sale  or  amalgamation  of  utility  properties. 

(c)  Capitalization  in  connection  with  proposed  bond  or  stock  issues. 

(d)  Establishing  proper  basis  for  taxation. 

(e)  Establishing   uniform    accounting  systems   at   the  instigation  of 
utility  commissions. 

13.  History  and  Scope  of  Activities  of  Some  State  Commissions. 
—  In  view  of  the  frequent  reference  to  decisions  rendered  by  several  of 

the  State  commissions,  the  following  brief  synopsis  is  given  of  their  history 
and  the  scope  of  their  activities:  — 

The  State  of  Massachusetts  established  a  Board  of  Railway  Commis- 
sioners nearly  half  a  century  ago,  and  in  1885  created  a  Gas  and  Electric 
Commission,  with  jurisdiction  over  the  electric  light  and  gas  companies. 
Telephone  and  telegraph  companies  were  under  the  supervision  of  the 
Massachusetts  Highway  Commission  until  1913,  when  its  powers  were 
conferred  upon  the  newly  created  Massachusetts  Public  Service  Commis- 
sion. The  various  Massachusetts  commissions  concern  themselves  more 
particularly  with  matters  pertaining  to  the  regulation  of  service  than  with 
the  regulation  of  rates.  Since  1914  the  Massachusetts  Public  Service  Com- 
mission has  been  active  in  rates  and  service. 


6         TELEPHONE  RATES  AND  VALUES 

The  Wisconsin  Railroad  Commission  was  created  in  1905,  with  juris- 
diction over  the  railroads  operating  within  the  State  of  Wisconsin.  Sub- 
sequently its  duties  have  been  enlarged  to  include  supervision  over  electric 
light,  power,  heating,  gas,  water,  water  power,  telephone,  telegraph,  elec- 
tric railway  and  express  companies. 

The  Wisconsin  commission  has  made  a  specialty  of  rate  problems,  in- 
volving appraisement  work,  and  its  decisions  on  this  subject  are  probably 
more  widely  quoted  than  those  of  any  other  commission. 

Next  in  importance,  from  the  standpoint  of  rate  investigations  involving 
appraisement  work,  are  the  two  commissions  in  New  York  State,  estab- 
lished in  1907.  One  is  the  First  District  Commission,  having  jurisdiction 
over  all  public  utilities  in  New  York  City  except  the  telephone  company; 
and  the  other  is  the  Second  District  Commission,  supervising  all  of  the 
public  utility  companies  in  the  State  outside  of  New  York  City,  and  the 
telephone  company  in  New  York  City. 

The  Minnesota  Railroad  and  Warehouse  Commission,  established  in 
1899,  was  given  full  jurisdiction  over  railroad,  warehouse,  grain  elevator 
and  express  companies,  but  not  until  a  later  date  over  telephone,  electric 
light  and  power  companies.  The  commission  is  noted  for  its  exhaustive 
study  of  express  rate  problems,  and  for  its  valuation  of  the  railroads  within 
the  State. 

The  Washington  Railway  Commission,  created  in  1905  (now  called  the 
Washington  Public  Service  Commission),  has  jurisdiction  over  all  public 
utilities,  with  the  exception  of  municipally  owned  plants. 

In  1879  Georgia  created  a  railway  commission  with  jurisdiction  over  the 
railroads  operating  within  the  State,  and  subsequently,  in  1907,  increased 
its  authority  to  include  regulation  of  telephone,  telegraph,  gas,  electric 
light,  power,  express  and  dock  companies.  The  Georgia  commission  is 
better  known  for  its  regulation  of  stock  and  bond  issues  than  for  its  work 
on  matters  involving  appraisals. 

Nearly  all  of  the  other  States  in  the  Union  have  commissions  with 
jurisdiction  over  all  or  a  part  of  the  utility  corporations  within  their 
domain,  or  have  legislation  pending  at  present  to  provide  such  commis- 
sions. 

14.  Commission  Control  in  Wisconsin.  —  The  success  of  the  com- 
mission form  of  public  utility  control  in  Wisconsin,  from  the  standpoint  of 
the  utilities  themselves,  is  evident  from  the  following  recent  statement  of 
the  Governor  of  Wisconsin:  — 

As  evidence  of  prosperity  under  commission  regulation,  the  last  annual  report 
of  the  Wisconsin  commission  shows  that  during  the  year  the  operating  revenues 
of  electric  utilities  increased  20  per  cent,  their  net  income  29  per  cent,  and  new 
construction  for  the  year  145  per  cent.  The  operating  revenues  of  water  utilities 
meanwhile  increased  7  per  cent,  their  income  13  per  cent,  and  new  construction 
24  per  cent.  Gas  utilities  increased  their  operating  revenues  3  per  cent,  their  net 
income  15  per  cent,  and  new  construction  24  per  cent. 


PUBLIC    UTILITY    REGULATION  7 

Telephone  utilities  increased  their  operating  revenue  11  per  cent,  their  net 
income  9  per  cent,  and  construction  for  the  year  14  per  cent.  Railway  and 
traction  lines,  on  the  average,  increased  their  operating  revenues  13  per  cent, 
their  net  income  8  per  cent,  and  construction  an  equal  amount. 

All  utilities  in  Wisconsin  are  in  a  more  flourishing  condition  now  than  ever 
before,  and  are  planning  to  extend  their  operations  far  into  the  future. 

Public  control,  or  regulation  of  public  service  corporations  by  permanent  com- 
missions, has  come,  and  come  to  stay.  State  control  or  regulation  should  be  of 
such  a  character  as  to  encourage  the  highest  possible  standards  in  plant,  the  ut- 
most extension  of  facilities,  rigid  economy  in  operation,  rates  that  will  warrant 
the  highest  wages  for  the  best  service,  and  such  certainty  of  return  on  investment 
as  will  induce  investors  not  only  to  retain  their  securities,  but  to  supply  at  all  times 
all  the  capital  needed  to  meet  the  demands  of  the  public. 

Such  control  and  regulation  can  and  should  stop  all  abuses  of  capitalization, 
of  extortion,  of  overcharge,  or  of  unreasonable  division  of  profits. 


CHAPTER  II 
APPRAISAL  TERMS 

15.  Fundamental  Definitions.  —  The  science  of  appraisal  of  public 
utility  properties  is  comparatively  new.    It  is  therefore  natural  that  dis- 
crepancies should  arise,  not  alone  in  the  definition,  but  in  the  application 
of  the  numerous  terms  which  have  sprung  into  use  during  the  development 
of  the  subject. 

The  need  for  uniformity  in  definitions  has  been  realized,  and  several 
efforts  made  to  effect  a  standardization.  While  these  efforts  have  not  been 
entirely  satisfactory,  still,  certain  precedent  has  been  established.  This, 
together  with  the  decisions  of  the  courts  and  commissions,  has  resulted  in 
the  establishment  of  a  glossary  of  appraisement  terms,  which  is  pretty 
generally  accepted  by  both  the  engineering  and  legal  professions. 

The  short  glossary  of  the  fundamental  terms  used  in  appraisal  work, 
which  is  presented  in  this  chapter,  may  facilitate  a  clearer  grasp  of  a  sub- 
ject which  at  best  is  somewhat  illusive.  Other  terms  will  be  met  with  from 
time  to  time  as  the  subject  is  developed,  but  rather  than  risk  confusion  by 
attempting  too  many  definitions  at  the  outset,  an  effort  will  be  made  to 
clearly  explain  the  meaning  of  such  other  terms  on  the  occasion  of  their 
first  use. 

In  compiling  the  following  definitions,  an  attempt  has  been  made  to  give 
only  such  definitions  as  have  received  the  endorsement  of  recognized 
authorities. 

Certain  definitions  are  essential  at  the  outset  of  a  study  of  appraisal 
work  to  facilitate  an  intelligent  development  of  the  subject.  These  defi- 
nitions include  such  fundamentals  as  utility,  property,  cost,  value  and 
appraisal. 

16.  Utility.  —  Utility  is  defined  by  the  Standard  dictionary  as  "the 
quality,  character  or  state  of  being  useful  or  serviceable;  fitness  to  supply 
the  natural  needs  of  man;  that  serviceableness  which  is  the  basis  of  the 
value  of  a  thing." 

The  keynote  of  the  present  application  of  the  word  "utility"  is  sounded 
by  the  phrase  "character  or  state  of  being  useful  or  serviceable."  It  sug- 
gests the  dispensation  of  service  rather  than  that  of  some  tangible  com- 
modity, such  as  sugar  or  coffee,  which  can  be  wrapped  up  in  a  paper  bag 
and  carried  home  by  the  purchasen 

It  therefore  follows  that  public  utility  corporations  are  those  corpora- 
tions which  supply  the  public  with  "service,"  whether  it  be  transporta- 
tion, telephone,  telegraph,  light,  power  or  express  service.  The  com- 


APPRAISAL    TERMS  9 

modity  sold  to  the  public  is  service,  and,  in  fact,  the  companies  falling  in 
this  class  are  often  known  as  "  public  service  companies." 

17.  Property.  —  Property  may  be  denned  as  the  "  legal  right  to  the 
possession,  use,  enjoyment  and  disposal  of  a  thing."    Property,  as  applied 
to  public  utilities,  usually  consists  of  two  elements,  —  physical  property 
and  non-physical  property. 

The  physical  property  of  a  utility  corporation  constitutes  its  material 
possessions,  such  as  land,  buildings,  tracks,  rolling  stock,  machinery,  pole 
lines,  subways,  etc. 

The  non-physical  property  —  sometimes  called  intangible  property  — • 
is  made  up  of  such  items  as  good  will,  franchise  privilege,  going  value,  etc. 

18.  Value.  —  The  terms  cost  and  value  are  so  often  erroneously  used 
as  synonyms  that  a  special  effort  should  be  made,  at  the  outset  of  a  study 
of  appraisal  work,  to  obtain  a  clear  understanding  of  their  respective  mean- 
ings and  use. 

" Value  is  the  Latin  term  corresponding  to  the  Saxon  "worth.'  The 
fundamental  idea  which  underlies  worth  is  capacity  to  satisfy  want.  If 
we  need  a  nail  and  find  a  broken  one,  we  say  that  it  is  worth  nothing,  — 
that  it  is  valueless,  or  not  valuable,  for  our  purpose.  Value  or  worth  thus 
implies  usefulness  or  utility.  .  .  . 

"As  a  preliminary  definition,  then,  we  may  say  that  the  value  of  any- 
thing is  the  expression  of  our  estimate  of  its  utility,  meaning  by  utility  its 
capacity  to  satisfy  human  wants.  Value  .  .  .  has  a  meaning  only  when 
attached  to  a  definite  quantity  of  an  article.  The  value  of  iron  means 
nothing;  that  value  of  a  ton  of  iron  means  something."1 

This  definition  and  accompanying  illustration,  while  serving  to  illus- 
trate the  meaning  and  use  of  the  word  "value,"  do  not  tell  the  whole  story. 
Notwithstanding  the  fact  that  the  broken  nail  is  useless  for  ordinary  pur- 
poses, it  may,  nevertheless  — •  under  certain  conditions  —  have  a  value. 
If,  for  instance,  it  had  been  originally  found  in  a  junk  pile,  with  other  bits 
of  scrap  metal,  there  would  be  a  certain  scrap  or  disposal  value  if  sold  with 
the  rest  of  the  metal  as  junk. 

Value  is  unquestionably  influenced  by  scientific  development.  Certain 
articles,  which  have  a  very  definite  value  at  present,  were  practically  worth- 
less twenty  to  twenty-five  years  ago.  Coal  tar  may  be  cited  as  an  example. 
A  few  years  ago  coal  tar  was  a  practically  useless  by-product.  The  advance 
of  science  during  the  past  decade  has  evolved  a  very  large  number  of  com- 
mercial and  medicinal  uses  for  this  hitherto  practically  valueless  substance. 

In  the  last  analysis  the  measure  of  value  is  largely  dependent  upon  bar- 
ter or  sale,  —  upon  what  can  be  obtained  for  the  object  under  considera- 
tion in  an  open  market,  under  normal  conditions,  if  offered  for  sale  or  ex- 
change. 

1  "Principles  of  Economics,"  by  Edwin  R.  A.  Seligman,  pp.  173,  175,  189. 


10        TELEPHONE  RATES  AND  VALUES 

19.  Cost.  —  "The  word  'cost'  is  used  in  a  variety  of  senses.    To  the 
consumer  'cost'  means  price.    If  a  thing  costs  a  dollar,  he  means  that  the 
price  is  a  dollar.    To  the  employer  '  cost '  means  total  cash  outlay  expended 
in  production.    Here  the  cost  is  usually  less  than  the  price,  the  difference 
between  cost  and  price  being  profit;  a  machine  may  cost  the  builder  $10 

-  he  may  sell  it  for  S12."1 

In  appraisal  work  the  cost  of  an  article  is  the  price  paid  at  the  time  of 
its  original  purchase,  or  the  price  which  would  have  to  be  paid  to  replace 
it  under  conditions  existent  at  the  time  of  the  appraisal,  plus  such  expend- 
itures for  labor  and  incidentals  as  may  be  involved  in  preparing  it  for 
actual  service. 

20.  Appraisal.  —  The  Standard  dictionary  defines  appraisal  as  "The 
act  of  appraising;    valuation;    especially,   official  valuation,   as  of  an 
estate,  etc." 

The  term  is  also  used  to  designate  the  completed  data,  usually  in  report 
form,  resulting  from  the  valuation  of  a  property.  The  terms  "appraise- 
ment" and  "valuation"  are  frequently  used  as  synonyms  for  appraisal. 

21.  Reasons  for  making  Appraisals.  —  There  are,  generally  speak- 
ing, five  purposes  for  which  appraisals  of  public  utility  properties  are 
made :  — 

(a)  As  a  basis  for  rate  regulation. 

(6)  In  connection  with  the  sale  or  amalgamation  of  utility  properties. 

(c)  In  connection  with  proposed  bond  or  stock  issues. 

(d)  As  a  basis  for  taxation. 

(e)  As  a  basis  for  establishing  uniform  accounting  systems. 

22.  Fair  Value.  —  Whatever  the  method  used  in  making  an  appraisal, 
or  whatever  the  ultimate  use  to  which  it  is  to  be  put,  the  prime  object  is 
always  the  same,  —  the  determination  of  a  "fair  value"  for  the  property 
in  question.     Just  what  constitutes  "fair  value,"  what  items  should  be 
included  in  its  derivation,  and  what  method  followed  in  computing  its 
physical  component,  has  proved  a  bone  of  contention  among  appraisal 
experts  since  the  subject  first  sprang  into  prominence. 

That  these  questions  are  far  from  settled  is  shown  by  the  lack  of  uni- 
formity in  the  decisions  of  courts  and  commissions,  and  by  the  conflicting 
opinions  expressed  by  experts.  Nevertheless,  the  pioneer  stage  of  the 
subject  has  passed,  and  sufficient  authoritative  data  are  available  to  render 
possible  an  intelligent  analysis  of  specific  appraisement  problems,  although 
no  hard  and  fast  rule  can  be  laid  down  as  to  the  best  means  of  deriving 
"fair  value."  The  method  followed  must,  to  a  large  extent,  be  dependent 
upon  the  exigencies  of  the  case  under  consideration. 

The  word  "fair"  suggests  justice.  Obviously,  what  may  be  a  fair  value 
under  one  set  of  conditions  may  be  most  unfair  under  another,  due  to 

i  "Principles  of  Economics,"  by  Edwin  R.  A.  Seligman,  p.  190. 


APPRAISAL    TERMS  11 

differences  in  material  and  labor  markets,  and  to  other  variable  factors 
which  necessarily  must  have  careful  consideration  in  the  determination 
of  fair  value. 

23.  Factors  involved  in  Determination  of  Fair  Value.  —  In  the 
case  of  Covington  &  Lexington  Turnpike  v.  Sanford,  164  U.  S.  578,  the 
United  States  Supreme  Court  set  forth  the  following  factors  for  considera- 
tion in  determining  the  fair  value  of  a  property:  — 

(a)  Original  cost. 

(6)  Amount  expended  in  permanent  improvements. 

(c)  Amount  and  market  value  of  stocks  and  bonds. 

(d)  Replacement  cost. 

(e)  Probable  earning  capacity. 
(/)  Operating  expenses. 

Again,  in  the  case  of  the  Manitowoc  Water  Company,  the  Wisconsin 
Railroad  Commission  rendered  the  following  statement,  which  seems  to 
express  the  general  attitude  of  courts  and  commissions :  — 

In  determining  the  value  of  the  physical  property  of  a  public  utility,  several 
elements  must  be  taken  into  consideration.  The  three  elements  of  greatest  im- 
portance in  fixing  the  value  of  such  plants  are :  the  original  cost ;  the  cost  of  repro- 
ducing the  plant;  and  the  present  value.  As  to  which  of  these  elements  shall  be 
given  the  greatest  consideration  must  depend  upon  the  circumstances  in  each 
case,  and  must  also  depend  upon  the  purpose  for  which  the  valuation  is  made, 

24.  Physical  Value.  —  As  the  name  suggests,  physical  value  is  the 
value  of  the  physical  property,  i.e.,  that  portion  of  the  property  which  can 
be  "seen  and  felt,"  and  which  is  " capable  of  being  inventoried."    Theo- 
retically, the  foregoing  definition  is  correct  in  limiting  physical  value  to 
the  purely  physical  assets. 

Current  appraisal  practice,  however,  sanctions  the  inclusion,  under 
physical  value,  of  a  group  of  non-physical  assets  which,  by  nature,  are 
almost  inseparable  from  the  purely  physical  property.  As  an  illustration, 
a  power  transmission  line  may  be  located  on  private  right  of  way.  The 
company  may  not  own  the  land  upon  which  the  poles  are  placed,  but  per- 
haps has  paid  the  owners  for  the  right  to  use  it  for  an  extended  period  of 
time,  and  has  incurred  certain  incidental  expenditures  in  acquiring  such 
rights. 

Obviously,  the  value  of  the  right  of  way,  as  represented  by  the  actual 
cost  of  securing  it,  is  closely  allied  to  the  value  of  the  pole  and  wire  plant, 
notwithstanding  the  fact  that  the  company  has  not  title  to  the  land  itself. 
Right  of  way,  then,  is  one  of  the  non-physical  assets,  the  vaW  of  which  is 
included  with  that  of  the  physical  property  in  the  determination  of  the 
physical  value  of  a  property. 

25.  Collateral  Construction  Costs.  —  Other  items  usually  included 
with  the  value  of  the  invehtoriable  property  in  determining  physical  value 


12         TELEPHONE  RATES  AND  VALUES 

are  the  so-called  "  collateral  construction  costs."  These,  too,  are  so  closely 
allied  to  the  purely  physical  property  as  to  render  them  practically  insep- 
arable. The  collateral  construction  costs  generally  include  the  following 
items :  — 

(a)  General  and  legal  expense  during  construction. 

(6)  Engineering  and  general  supervision  during  construction. 

(c)  Taxes  during  construction. 

(d)  Insurance  during  construction. 
0)   Interest  during  construction. 

26.  Original  Cost.  —  It  is  frequently  argued  that  the  fairest  measure 
of  the  value  of  a  utility  company's  property  is  to  be  obtained  by  determin- 
ing the  original,  or  actual,  cost  of  the  property  involved  as  derived  from 
the  company's  books  and  records.    Unfortunately,  it  is  rarely  possible  to 
employ  the  original  cost  method. 

Public  utilities  are  peculiarly  susceptible  to  reorganization,  consolida- 
tion and  change  of  ownership.  Records  of  original  cost  have  frequently 
been  lost  —  sometimes  intentionally  —  during  changes  of  this  character. 

Fires  and  floods  are  also  factors  to  be  reckoned  with  in  the  preservation 
of  adequate  and  reliable  records  of  original  cost.  Again,  antiquated 
methods  of  bookkeeping  may  be  responsible  for  the  segregation  of  portions 
of  the  original  cost  —  such,  for  example,  as  the  labor  and  miscellaneous 
expenditures  incidental  to  installation  of  machinery  —  from  the  capital 
accounts.  Some  companies  improperly  include  such  items  with  mainte- 
nance or  operating  expenses. 

Granting  that  all  of  these  objections  may  be  overcome,  there  is  still  a 
question  whether  the  original  cost  method  of  appraisement  affords  a  fair 
value  of  the  property,  at  least,  for  purposes  of  rate  regulation.  As  an  illus- 
tration, assume  that  a  plant  built  some  ten  or  fifteen  years  ago  is  being 
appraised  at  the  present  time. 

Labor  and  material  costs  were  considerably  lower  at  that  time.  A  rate- 
base  value  determined  by  the  original  cost  method  would  necessarily  be 
much  lower  than  one  based  upon  present  costs.  Nevertheless,  the  com- 
pany's operating  and  maintenance  forces  are  paid  in  accordance  with  pres- 
ent labor  rates.  Obviously,  there  is  a  grave  question,  in  a  case  of  this  kind, 
as  to  the  fairness  of  a  plan  which  limits  the  earning  capacity  of  the  company 
by  basing  its  service  rates  upon  the  original  cost  alone. 

27.  Cost  to  Replace  New,  Replacement  Cost  or  Cost  of  Reproduc- 
tion. — •  "These  terms,  so  much  in  evidence  nowadays  and  recognized  by 
the  courts,  refer  to  an  assumed  value  based  on  the  estimated  cost  of  repro- 
ducing the  property  new  on  the  basis  of  prices  current  at  the  time  of  esti- 
mate, —  prices  that  fluctuate  considerably  are  averaged  for  five  years  pre- 
ceding the  date  of  the  appraisal,  —  and  is  made  up  to  include  everything 
that  can  be  inventoried  regardless  of  original  cost,  age,  service  value,  or 
present  condition  as  affected  by  depreciation. 


APPRAISAL   TERMS  13 

"  Of  course,  a  defect  in  the  reproduction  cost  theory  is  that  a  utility 
cannot  buy  its  materials,  labor,  property  at  average  figures,  but  must  make 
its  expenditures  when  times  and  conditions  or  ordinances  may  require, 
often  during  periods  of  prosperity  which,  consequently,  means  during 
periods  of  inflated  prices."1 

28.  The  Reproduction  Method  of  Appraisement.  —  The  reproduc- 
tion method  is  probably  the  one  most  frequently  used  in  the  determination 
of  the  value  of  public  utility  properties,  and,  all  things  considered,  the  most 
satisfactory. 

It  should  be  clearly  borne  in  mind,  however,  that  there  are  numerous 
factors  involved  in  an  appraisement  aside  from  the  actual  price  which  has 
been  paid  for,  or  which  would  have  to  be  paid  to  replace,  the  component 
items  of  plant.  As  an  illustration,  certain  equipment  in  a  power  plant  may 
have  cost  $100  f.  o.  b.  point  of  purchase.  If  the  freight  amounted  to  $5, 
the  cartage  from  depot  to  plant  $1,  and  the  cost  of  installation  $10,  then 
the  total  cost  would  be  $116. 

If  the  appraisement  was  being  made  on  the  basis  of  original  cost,  all  of 
these  items  would  be  determined  from  the  books  and  records  of  the  com- 
pany. However,  in  the  event  that  cost  records  were  incomplete  or  unre- 
liable, it  would  be  necessary  to  resort  to  the  reproduction  cost  method  of 
appraisement.  Having  determined  from  dealers'  quotations  the  current 
market  price  of  a  machine  of  the  type  in  question,  the  appraiser  would 
estimate  that  cost  of  installation,  freight,  etc.,  basing  his  estimate  on 
material  and  labor  prices  which  he  considers  fair  for  use  at  the  time  of 
the  appraisal. 

29.  Unit  Cost.  —  The  physical  property  of  a  utility  company  is  neces- 
sarily composed  of  a  number  of  elements  of  widely  varying  types.    For 
instance,  the  component  parts  of  a  telephone  plant  include  the  central  office 
equipment,  subscribers'  station  equipment,  underground  subway  system, 
underground  and  aerial  cable  systems,  pole  lines  and  wire  plant. 

Each  of  these  general  classifications  may  be  subdivided  into  smaller  ho- 
mogeneous groups  whose  component  parts  are  known  as  units.  Thus,  a 
pole  plant  may  include  several  different  types  of  poles,  such  as  35-foot, 
7-inch  top;  30-foot,  6-inch  top;  and  25-foot,  6-inch  top  poles. 

Each  pole,  then,  constitutes  a  unit  of  the  class  to  which  it  belongs.  If 
the  poles  have  been  set  under  similar  conditions,  a  cost  per  pole  may  be 
derived  which  is  applicable  to  any  pole  in  the  class.  Such  a  cost  is  known 
as  a  "unit  cost." 

30.  Scrap  Value. —  Henry  Floy,  in  " Valuation   of   Public  Utility 
Properties,"  says  that  "all  physical  property  has  a  certain  scrap  or  junk 
value,  —  a  minimum  basis  beyond  which  there  is  no  depreciation;  hence 
physical  property  can  only  deteriorate  until  it  reaches  a  scrap  value." 

i  "Valuation  of  Public  Utility  Properties,"  by  Henry  Floy,  pp.  18,  19. 


14         TELEPHONE  RATES  AND  VALUES 

This  statement  illustrates  the  meaning  of  the  term  "  scrap  value."  A 
machine  which  originally  cost  $125  weighs  700  pounds.  At  the  end  of  a 
useful  life  it  can  be  sold  for  old  material  at  5  cents  a  pound.  However,  if 
the  cost  of  breaking  up  and  preparing  it  for  junk  amounts  to  $25,  the  scrap 
or  junk  value  is  the  market  value  of  the  metal  less  the  cost  of  junking,  — 
in  this  case  $35  (700  pounds  times  $0.05)  less  $25,  or  $10. 

B.  J.  Arnold,  in  the  Coney  Island  &  Brooklyn  Railroad  rate  case,  defines 
scrap  value  as :  "  Scrap  value  is  determined  by  allowing  a  fair  market  price 
for  the  material  or  scrap,  less  the  cost  of  turning  it  over  to  the  dealer." 

31.  Salvage  Value  for  Re-use.  —  It  frequently  happens  that  portions 
of  a  company's  plant  are  retired  from  active  service  for  reasons  other  than 
physical  deterioration,  and  before  the  end  of  their  useful  life. 

This  is  especially  true  in  the  case  of  rapidly  growing  utilities,  where  con- 
stant changes  of  equipment  are  necessitated,  both  to  provide  for  plant  en- 
largements and  keep  pace  with  engineering  and  economic  developments. 
In  such  instances  it  is  often  possible  to  find  a  market  for  the  plant  removed 
at  a  value  considerably  higher  than  the  scrap  or  junk  value  by  disposing 
of  it  to  other  concerns  in  the  same  business,  or  to  dealers  in  second-hand 
equipment  of  the  type  involved. 

This  value  has  been  termed  "salvage  or  disposal  value."  It  may  be 
defined  as  the  market  worth  of  the  equipment  in  question,  at  the  time  of 
its  removal  from  plant,  less  the  cost  of  preparation  for  sale. 

32.  Wearing  Value.  —  The  difference  between  the  cost  of  physical 
property  —  whether  it  be  determined  by  the  original  cost  or  reproduction 
cost  method  —  and  the  scrap  value  is  known  as  the  wearing  value. 

The  wearing  value  entirely  passes  away  during  the  useful  life  of  the 
property,  for  reasons  which  will  be  discussed  more  in  detail  under  the  sub- 
ject of  depreciation.  As  an  illustration,  if  the  original  cost  of  a  machine 
is  $125  and  the  scrap  value  $10,  the  difference  ($115)  will  have  entirely 
disappeared  at  the  end  of  the  useful  life  of  the  machine.  This  amount  of 
$115  represents  the  wearing  value  of  the  machine  in  question. 

33.  Service  Value.  —  It  is  evident  that  the  various  portions  of  an 
operating  plant  have  a  greater  value  when  associated  with  the  plant  as  a 
whole  than  they  would  if  considered  individually.    In  other  words,  each 
unit  of  plant  forms  a  link  in  the  production  chain,  and  its  value  is  neces- 
sarily greater  as  a  part  of  the  chain  than  as  an  isolated  link. 

This  value  is  known  as  "service  value,"  and  lies  between  the  original 
cost  —  or  the  reproduction  cost  —  and  the  salvage  value.  In  the  case  of 
City  of  Appleton  v.  Appleton  Waterworks  Company,  5  W.  R.  C.  R.  215, 
the  Wisconsin  commission  says :  — 

In  this  connection  (the  determination  of  fair  value)  the  service  value  of  the 
plant  cannot  be  ignored,  for  "each  unit  of  the  plant  has  a  value  because  of  its 
co-ordination  and  articulation  with  other  units,  thus  forming  with  such  units  a 
complete  mechanism  capable  of  transmitting  useful  service." 


APPRAISAL  TERMS  15 

34.  Depreciation.  —  The  Century  dictionary  defines  depreciation  as 
"a  fall  in  value;   reduction  in  worth/'  and  the  Standard  dictionary  as  a 
''lowering  in  worth." 

In  discussing  the  relation  of  depreciation  to  public  utilities,  Dr.  R.  H. 
Whitten  says:  "Depreciation  can  be  denned  as  the  lessened  utility  value 
caused  by  physical  deterioration  or  lack  of  adaption  to  function." 

35.  Principal  Causes  of  Depreciation.  —  There  are  four  principal 
causes  of  depreciation:  — 

(a)  Wear  and  tear. 

(6)  Age  or  physical  decay. 

(c)  Inadequacy. 

(d)  Obsolescence. 

36.  Wear  and  Tear  Depreciation.  —  Depreciation  from  wear  and 
tear,  as  the  term  suggests,  is  that  resulting  from  use  or  service.    Generally 
speaking,  it  is  the  most  dominant  factor  in  the  depreciation  of  the  mechan- 
ical portion  of  a  utility  corporation's  plant. 

Machinery  necessarily  depreciates  more  rapidly  when  in  use  than  when 
lying  idle,  assuming  that  reasonable  precautions  are  taken  for  its  proper 
preservation  in  the  latter  case.  On  the  other  hand-,  outside  plant,  such  as 
pole  lines,  cable  and  wire,  is  not  appreciably  affected  by  service,  so  that  in 
this  case  depreciation  from  wear  and  tear  is  almost  negligible. 

37.  Age  or  Physical  Decay  Depreciation.  —  The  age  or  physical 
decay  class  of  depreciation  is  due  to  the  deterioration  of  plant  resulting 
from  age. 

38.  Depreciation  due  to  Inadequacy.  —  In  the  operation  of  large 
utility  companies  it  frequently  becomes  necessary  to  replace  plant  with 
plant  of  larger  type,  or  of  more  economical  design,  to  meet  the  requirements 
of  rapid  growth.    As  an  illustration:  in  suburban  New  York  the  telephone 
company  is  frequently  called  upon  to  replace  comparatively  new  aerial 
distributing  plant  with  underground  systems,  to  meet  an  unforeseen  and 
extremely  rapid  subscriber  growth. 

39.  Obsolescence  Depreciation.  —  "  Obsolescence  means  the  depre- 
ciation of  property  through  the  development  of  something  newer  and  either 
more  economical  or  more  of  a  fad.    Like  inadequacy,  it  may  necessitate 
the  abandonment  of  property  long  before  it  is  worn  out,  and  in  many  cases 
arises  largely  from  demands  of  the  public. 

"What  is  obsolete  in  one  place  may  not  be  affected  by  obsolescence  in 
another.  Note,  for  example,  the  recent  introduction  of  P.  A.  Y.  E.  cars 
in  the  larger  cities,  or  the  use  of  open-bench  cars  in  the  Borough  of  the 
Bronx,  where  they  are  by  many  considered  good  practice,  while  at  the 
same  time  they  are  by  many  considered  obsolete  for  the  Borough  of  Man- 
hattan, all  within  New  York  City."1 

40.  Other  Subdivisions  of  Depreciation.  —  The  subject  of  depre- 

i  "Valuation  of  Public  Utility  Properties,"  by  Henry  Floy. 


16         TELEPHONE  RATES  AND  VALUES 

elation  may  also  be  subdivided  under  the  classifications  "  physical  depre- 
ciation" and  "functional  depreciation." 

Physical  depreciation  is  that  resulting  from  wear  and  tear  and  age, 
while  functional  depreciation  is  caused  by  inadequacy  and  obsolescence. 

41.  Depreciation   Reserve.  —  Obviously,  some  adequate    provision 
must  be  made  for  the  constant  lessening  in  value  caused  by  depreciation. 
This  is  ordinarily  accomplished  by  the  establishment  of  a  fund,  known  as 
the  "depreciation  reserve/'  of  sufficient  magnitude  to  finance  the  replace- 
ment of  the  various  portions  of  plant  at  the  expiration  of  their  useful  life. 

There  are  two  universally  recognized  methods  of  building  up  the  depre- 
ciation reserve  fund,  known,  respectively,  as  the  "straight  line"  method 
and  the  "sinking  fund"  method. 

42.  Straight  Line  Method  of  building  up  a  Depreciation  Reserve. 
-  The  straight  line  method  of  building  up  a  depreciation  reserve  is  based 

upon  the  assumption  that  the  wearing  value  decreases  at  a  uniform  rate 
throughout  the  active  life  of  the  plant. 

If  a  unit  of  plant  is  valued  at  $100,  has  an  estimated  life  of  ten  years, 
and  a  net  scrap  value  at  the  end  of  that  time  of  $20,  then  the  wearing  value 
would  be  $80,  and  one-tenth  of  this  amount  would  be  set  aside  each  year 
for  the  depreciation  reserve. 

43.  Sinking  Fund  Method  of  providing  a  Depreciation  Reserve.  - 
"The  sinking  fund  method  assumes  that  an  amount  is  set  aside  each  year, 
which,  invested  at  compound  interest,  will  equal  the  total  wearing  value 
at  the  end  of  the  assumed  life.    The  depreciation  at  any  time  is  said  to 
exactly  equal  the  amount  that  is,  as  should  be  in  a  sinking  fund,  accumu- 
lated in  this  way. 

"Under  the  sinking  fund  method  the  existing  depreciation  fund  is 
always  less  than  it  would  be  under  the  straight  line  method.  The  degree 
to  which  it  varies  will  depend  largely  on  the  rate  of  interest  at  which  the 
fund  is  assumed  to  accumulate.  The  higher  the  rate  of  interest  assumed, 
the  smaller  will  be  the  existing  depreciation  under  the  sinking  fund  method 
as  compared  with  what  it  would  be  under  the  straight  line  method. 

"The  difference  between  the  two  methods  is  not  great  for  a  unit  with 
short  life,  but  for  a  unit  having  a  fifty-year  life  the  excess  of  the  existing 
depreciation,  as  shown  by  the  straight  line  method  over  that  shown  by  the 
sinking  fund  method,  may  be  enormous.  The  sinking  fund  method  may 
be  justified  as  a  simple  accounting  method  of  apportioning  evenly  a  loss 
which  will  not  actually  accrue  until  the  unit  needs  to  be  renewed."1 

44.  Present  Value.  —  Present  value  may  be  defined  as  the  "estimated 
value  of  the  physical  property  as  it  exists  at  the  period  being  considered." 
It  is  usually  determined  by  deducting  the  accumulated  depreciation,  as 
of  the  date  under  consideration,  from  the  original  cost  or  from  the  repro- 
duction cost. 

i  "Valuation  of  Public  Utility  Properties,"  by  Dr.  R.  H.  Whitten. 


CHAPTER  III 
DETERMINATION   OF  FAIR  VALUE 

45.  Demand  for  Competent  Regulation.  —  Until  early  in  the  pres- 
ent century  comparatively  little  thought  had  been  given  to  the  subject  of 
public  utility  regulation.    Notwithstanding  the  fact  that  several  of  the 
States  had  already  established  public  service  commissions,  the  great  ma- 
jority of  the  people  —  and  even  many  eminent  political  economists  — 
seemed  to  feel  that  the  commission  form  of  regulation  was  a  useless  finan- 
cial burden  upon  the  community,  and  that  the  cheapest  and  most  effective 
method  of  insuring  reasonable  rates  was  to  provide  plenty  of  competition. 

Gradually,  with  the  development  of  the  idea  that  many  utilities  are 
natural  monopolies,  came  the  demand  for  competent  Federal,  State  or 
municipal  regulation,  not  only  of  the  rates  charged  for  the  commodities 
dispensed  by  the  utilities,  but  likewise  of  the  quality  of  the  service  ren- 
dered. 

46.  First  Idea  of  Basis  for  Fair  Rates.  —  With  the  supersession  of 
the  competitive  by  the  commission  form  of  regulation  came  the  need  for 
an  adequate  basis  of  determining  fair  rates.    At  first  thought,  the  problem 
may  appear  comparatively  simple.    To  the  casual  student  of  rate  matters 
there  would  seem  but  one  answer,  —  determine  the  actual  investment  as 
evidenced  by  the  utilities'   bond  and  stock  issues,  and  establish  rates 
adequate  to  provide  a  reasonable  return  on  the  investment. 

It  soon  developed,  however,  that  things  were  not  always  what  they 
seemed.  Over-capitalization  and  methods  of  financing  that  were,  to  say 
the  least,  questionable  were  discovered  at  every  turn.  Discriminatory 
rates  in  the  majority  of  cases  would  inevitably  have  resulted  had  this 
investment  method  been  adopted. 

47.  Original  Cost  Method  as  Basis  for  Rates.  —  Naturally  the  next 
plan  that  suggested  itself  was  the  determination  of  the  actual,  original  cost 
of  the  properties  involved.    Here,  again,  apparently  insurmountable  diffi- 
culties were  encountered. 

Public  service  corporations  were  at  that  time  peculiarly  susceptible  to 
reorganizations  and  changes  of  administration.  Books  and  records  of  orig- 
inal cost  were  frequently  lost  or  destroyed,  sometimes  intentionally.  For 
this  and  other  reasons  regulatory  bodies  found  that  in  the  majority  of 
cases  it  was  almost  impossible  to  obtain  a  complete  record  of  original  cost. 

48.  Use  of  Book  Values  for  a  Rate-base  Value.  —  Another  method 
of  ascertaining  rate-base  values,  which  proved  even  less  satisfactory,  in- 
volved the  use  of  the  company's  book  values.    The  vagaries  of  accounting 


18         TELEPHONE  RATES  AND  VALUES 

systems  usually  rendered  values  so  determined  entirely  unsuitable  for  rate 
base  purposes,  due  partially  to  the  intermingling  of  construction  and 
maintenance  expenditures. 

49.  Reproduction  Cost  Method.  —  It  was  just  such  difficulties  as 
these  that  led  to  the  evolution  of  the  so-called  "reproduction"  theory  as  a 
basis  for  determining  the  fair-rate  base  value  of  utility  properties. 

The  reproduction  cost  method,  involving  as  it  does  the  assumed  repro- 
duction of  the  property  under  conditions  existing  at  the  time  of  the  ap- 
praisal, forms  a  basis  for  determining  rate-base  values  that  at  least  has 
the  advantage  of  being  independent  of  inconclusive  records  and  mislead- 
ing systems  of  accounting. 

Probably  the  most  frequently  used  base  for  rate-making  is  cost  of  re- 
production new  less  depreciation,  or  present  value,  as  it  is  more  frequently 
called.  Present  value  may  be  derived  either  from  the  original  cost  or  from 
the  reproduction  cost  by  deducting  the  accrued  depreciation  as  of  the 
date  of  appraisal.  The  method  may  perhaps  be  better  determined  after 
reading  the  discussion  in  a  subsequent  chapter. 

50.  The  Three  Recognized  Bases  for  Rate-making.  —  There  are, 
then,  three  recognized  bases  for  rate-making  now  universally  in  vogue. 
These  are :  — • 

(a)  Original  cost. 

(6)  Reproduction  cost  new. 

(c)  Reproduction  cost  new  less  depreciation,  or  present  value. 

All  of  the  bases  may  be,  and  frequently  are,  factors  in  the  determination 
of  the  rate-base  value  for  a  specific  property.  In  fact,  the  United  States 
Supreme  Court  and  several  of  the  State  commissions  have  ruled  that  all 
three  of  these  elements  should  be  carefully  considered  in  the  determination 
of  fair  value  for  rate-making  purposes. 

In  the  Manitowoc  Water  Company  case  the  Wisconsin  Railroad  Com- 
mission made  the  following  statement:  — 

The  three  elements  of  greatest  importance  in  fixing  the  value  of  such  plants 
(public  utility  plants)  are:  the  original  cost,  the  cost  of  reproducing  the  plant, 
and  the  present  value.  As  to  which  of  these  elements  shall  be  given  the  greatest 
consideration  must  depend  upon  the  circumstances  in  each  case,  and  must  also 
depend  upon  the  purpose  for  which  the  valuation  is  made. 

With  this  brief  resume  of  the  various  bases  used  for  determining  fair 
value,  a  more  detailed  analysis  of  these  "elements,"  as  the  Wisconsin  com- 
mission terms  them,  may  perhaps  be  more  readily  followed  by  one  not 
already  versed  in  appraisal  matters. 

51.  Original  Cost.  —  Henry  Floy,  in  "Valuation  of  Public  Utility 
Properties,"  says  that  "original  cost  is  usually  taken  to  mean  the  actual 
expenditures  made  for  physical  properties,  including  original  construction 
and  usually  all  additions  since  that  time.    The  term  is  taken  to  include 


DETERMINATION  OF  FAIR  VALUE 


19 


those  items  which  are  classed  as  '  development  expenses, '  and  occasionally 
even  the  value  of  franchise,  good  will  or  going  value." 

52.  Elements  of  Total  Cost.  —  It  may  be  well  to  pause  for  a  moment 
and  consider  the  terms,  development  expenses,  franchises  and  going  value. 

Regardless  of  whether  the  ultimate  object  of  an  appraisal  is  to  determine 
the  original  cost,  the  reproduction  cost,  or  the  present  value  of  the  prop- 
erty under  consideration,  there  are  certain  elements  that  enter  into  the 
final  result  other  than  the  appraisement  of  the  tangible  or  inventoriable 
property.  The  following  diagram  (Fig.  1)  may  serve  to  illustrate  the  cor- 
relation of  these  various  elements  of  total  cost. 


Cost  of  inventoriable  property, 

Incidentals,  omissions  and  contingencies,   

Warehouse  and  purchasing  expense  during  construction, 

Tools  and  tool  expense  during  construction 

Contractor's  profit,  


General  and  legal  expense  during  construction, 

Engineering  and  general  supervision  during  construction, . . . 

Taxes  during  construction,  , 

Insurance  during  construction 

Interest  during  construction, 

Working  capital, 

Construction  in  progress, 


Direct 
con- 
struction 
costs. 


Col- 
lateral 
con- 
struction 
costs. 


Cost  of  establishing  business,  or  going  value, 

Cost  of  financing 

Franchise  value 

Good  will 

Value  of  contracts  or  agreements, 


Total 

physical 

costs. 


Total 
non- 
physical 
assets. 


Total 
cost 

of  prop- 
erty. 


FIG.  1.  —  Correlation  of  various  elements  of  total  cost. 

It  will  be  seen  that  there  are  two  general  classifications  into  which  the 
component  elements  of  total  cost  may  be  divided,  —  the  physical  costs 
and  the  non-physical  assets. 

To  conform  strictly  to  the  generally  accepted  meaning  of  the  term 
"physical,"  the  physical  costs  should  include  only  the  first  item,  —  cost  of 
inventoriable  property.  Current  appraisal  practice,  however,  sanctions 
the  inclusion,  under  the  general  caption  "Physical  Costs,"  of  a  group  of 
non-physical  costs  which  by  nature  are  almost  inseparable  from  that  of 
the  purely  physical  property.  Those  most  closely  allied  to  the  portion  of 
the  plant  appraised  by  inventory  are  grouped  together  under  the  caption 
"Direct  Construction  Costs." 

The  "development  expenses"  referred  to  by  Mr.  Floy  are  here  termed 
"Collateral  Costs."  They  include  those  additional  elements  of  physical 
cost  incurred  immediately  prior  to  and  during  the  actual  construction  of 
a  utility  property. 

53.  Intangible  Value  or  Non-physical  Assets.  —  In  addition  to  the 
direct  and  collateral  construction  costs  there  is  still  another  group  of  items 
component  to  the  total  cost.  This  group  is  frequently  called  the  "intangi- 
ble value." 

The  use  of  the  word  "  intangible  "  in  this  connection  is  unfortunate.  To 
most  people  it  suggests  something  unreal  and  ethereal,  and  it  is  only  natural 


20         TELEPHONE  RATES  AND  VALUES 

that  courts  and  commissions  should  regard  with  suspicion  elements  of 
value,  submitted  for  their  consideration  in  determining  a  fair  rate-base 
value,  which  bear  such  an  unpromising  name. 

Such  factors  as  " going  value"  and  "cost  of  financing"  are  no  less  real 
in  the  development  of  a  going  concern  than  the  more  readily  appraised 
items  of  direct  and  collateral  construction  costs.  For  this  reason  the  term 
"non-physical  assets"  has  in  the  present  case  been  substituted  for  intan- 
gible value. 

54.  Going  Value.  —  Going  value  has  been  variously  denned  as  "the 
cost  of  establishing  the  business,"  "the  cost  of  acquiring  an  income,"  and 
"the  capitalization  of  early  losses  incurred  in  connection  with  the  develop- 
ment of  the  business  to  where  it  is  capable  of  producing  a  fair  return  on  the 
investment." 

55.  Good  Will. —  The  meaning  of  the  term  "good  will"  is  almost 
self-evident.    It  is  "the  probability  that  the  old  customers  will  continue  to 
resort  to  the  old  place  of  business."    Obviously,  good  will  has  no  place  in 
the  valuation  of  a  monopolistic  utility.    In  the  case  of  Bristol  v.  Bristol 
Waterworks  (23  R.  I.  278)  the  court  said:  - 

A  monopoly  has  no  good  will,  for  its  customers  are  retained  by  compulsion,  not 
by  their  voluntary  choice. 

56.  The  Cost  of  Financing.  —  The  cost  of  financing  may  be  defined 
as  the  cost  of  raising  the  money  necessary  to  build  the  plant  and  establish 
the  business.    In  other  words,  it  is  the  cost  of  marketing  a  company's 
bonds  and  stocks. 

57.  Ascertainment  of  Cost  of  Physical  Property.  —  From  the  fore- 
going resume  of  the  component  elements  of  the  total  cost  it  will  be  appar- 
ent that  the  determination  of  the  cost  of  the  inventoriable  portion  of  a 
utility  plant  by  no  means  completes  the  task  of  the  appraiser.    If  the 
investigation  is  being  conducted  along  the  line  of  original  cost,  then  both 
physical  and  non-physical  costs  will  be  ascertained  from  a  detailed  inves- 
tigation of  the  history  of  the  property. 

An  inventory  of  the  purely  physical  property  should  be  made  as  of  the 
date  of  appraisal,  and  used  as  a  means  of  identifying  the  various  portions 
of  plant  in  the  subsequent  check  against  the  cost  records.  As  an  illustra- 
tion, assume  the  case  of  a  plant  having  40,000  25-foot  poles. 

After  these  poles  have  been  carefully  inventoried  and  identified  in  the 
field,  an  investigation  shows  that  50  per  cent  of  the  total  number  were 
placed  at  the  time  of  the  original  plant  construction,  and  the  other  50  per 
cent  placed  piecemeal  subsequently. 

By  checking  work  orders  and  original  estimates,  it  may  be  a  compara- 
tively simple  matter  to  ascertain  the  actual  cost  of  the  poles  placed  at  the 
time  of  the  original  plant  construction,  but  it  would  probably  be  much 


DETERMINATION  OF  FAIR  VALUE  21 

more  difficult  to  find  the  cost  of  the  20,000  poles  placed  subsequently.  Pos- 
sibly many  of  these  latter  poles  were  placed  in  connection  with  other  work 
under  conditions  precluding  the  segregation  of  the  cost  of  placing  poles 
from  that  of  placing  cross  arms  and  incidental  equipment. 

It  is  here  that  the  real  difficulty  of  the  investigator  begins.  At  best  he 
can  only  determine  approximately  the  cost  of  placing  poles,  —  supple- 
menting whatever  records  of  cost  he  is  able  to  find  with  his  own  indi- 
vidual judgment.  The  result  may  not  be  a  record  of  actual  original  cost, 
but  it  will  be  a  cost  derived  from  an  analysis  of  actual  conditions  prevalent 
at  the  time  the  poles  were  placed. 

58.  Weakness  of  Original  Cost  Theory.  —  It  is  such  difficulties  as 
those  just  mentioned  which  constitute  the  principal  weakness  of  the  origi- 
nal cost  up  to  a  certain  point,  but  it  has  been  the  experience  of  appraisal 
experts  that  there  are  many  items  indeterminable  by  the  original  cost 
method,  and  which  have  to  be  estimated  by  some  other  method. 

Collateral  costs  and  non-physical  assets  should  be  derived  entirely  from 
the  records  of  the  company.  The  substitution  of  separately  derived  costs 
of  the  inventoriable  portion  of  the  property  may,  in  rare  instances,  such 
as  the  case  cited,  be  permissible,  but  the  adoption  of  such  methods  with 
reference  to  the  so-called  intangible  elements  negates  the  advantages  usu- 
ally attributed  to  the  original  cost  method. 

The  general  attitude  of  courts  and  commissions  toward  original  cost  has 
been  favorable  as  to  its  value  as  a  factor  in  the  determination  of  rate-base 
values,  but  skeptical  as  to  the  feasibility  in  most  cases  of  obtaining  suffi- 
cient authoritative  data  to  warrant  their  use. 

59.  Reproduction  Cost.  —  Referring  to  the  definition  given  in  Chap- 
ter II,  "reproduction  cost"  may  be  defined  as  the  cost  of  replacing  the 
property  under  consideration  as  of  conditions  existent  at  the  time  of  the 
appraisal,  except  when  such  conditions  evidence  a  deviation  from  the  nor- 
mal material  and  labor  markets.    In  the  latter  case  prices  for  the  several 
years  preceding  the  appraisal  should  be  averaged. 

In  determining  the  reproduction  cost  of  a  utility  property,  an  inventory 
is  taken  of  the  physical  plant  as  of  the  date  of  appraisal.  Unit  costs  are 
then  prepared  and  applied  to  the  inventory  to  obtain  the  cost  of  the  strictly 
physical  property. 

60.  First  Step  in  the  Inventory.  —  The  preparation  of  the  inventory 
of  physical  plant,  at  first  thought,  may  seem  a  comparatively  simple, 
though  possibly  rather  tedious,  task.    The  appraisement  of  the  plant  of  a 
large  utility  corporation,  such,  for  instance,  as  that  of  a  telephone  com- 
pany, involves  so  many  items  of  comparatively  small  individual  worth, 
but  which  collectively  represent  large  plant  investments,  that  the  deter- 
mination of  quick  and  efficient  inventory  methods  has  become  a  very  im- 
portant factor  in  appraisal  work.    This  phase  of  the  subject  will  be  con- 
sidered in  more  detail  in  a  subsequent  chapter. 


22         TELEPHONE  RATES  AND  VALUES 

The  first  step  in  the  inventory  of  a  property,  under  the  reproduction 
cost  plan,  is  the  determination  of  the  date  of  appraisement.  Unless  there 
are  other  governing  factors,  the  date  at  which  the  inventory  is  started  is 
that  usually  selected.  The  actual  field  work  of  the  inventory  may  require 
several  months.  If  the  plant  under  consideration  is  a  large  one,  it  is  quite 
probable  that  a  certain  amount  of  construction  work  will  be  in  progress 
during  the  inventory  period. 

61.  Construction  Work  in  Progress  and  the  Inventory.  —  The 
plant  in  progress  of  construction  on  the  date  of  the  appraisal  should  not  be 
included  in  the  inventory,  but  should  be  separately  appraised  and  carried 
under  the  caption  "Construction  in  Progress."     The  reproduction  cost 
of  all  construction  in  progress  will,  of  course,  be  included  in  the  determina- 
tion of  the  total  cost  of  the  property,  but  not  as  a  part  of  the  operating 
physical  plant. 

Plant  in  progress  of  construction  during  the  inventory  period,  but  started 
subsequent  to  the  date  of  appraisal,  should  be  eliminated  entirely  from 
the  inventory  of  operating  plant.  The  material  used  in  its  construction 
may  be  included  in  the  inventory  of  stores  and  supplies,  however,  if  it  is 
actually  on  hand  at  the  appraisal  date. 

The  segregation  of  these  two  items  —  plant  in  progress  of  construction 
at  the  date  of  appraisal,  and  plant  construction  undertaken  subsequent 
to  date  of  appraisal  —  can,  perhaps,  be  most  readily  effected  by  a  check 
of  the  construction  estimates  and  work  orders  for  the  period  immediately 
prior  to  and  subsequent  to  the  date  of  appraisal.  This  check  may  be  effec- 
tively supplemented  by  careful  observation  on  the  part  of  the  field  inspec- 
tors, noting  plant  of  obvious  recent  construction. 

62.  Unit  Costs.  —  The  unit  costs  used  in  determining  the  reproduc- 
tion cost  should  be  representative  of  conditions  existent  at  the  time  of  the 
appraisal  of  the  property.    Representative  costs  may  not  be,  and  usually 
are  not,  those  prevalent  at  the  exact  date  when  the  appraisal  is  made. 

A  careful  analysis  of  the  company's  invoices  for  several  years  preceding 
the  appraisal,  and  a  study  of  labor  rates  and  of  the  conditions  encountered 
by  the  company  in  the  performance  of  its  actual  construction  work,  should 
all  have  due  weight  in  determining  the  unit  costs.  This  is  a  task  which 
should  have  the  careful  supervision  of  the  engineer  in  charge  of  the  ap- 
praisal, and  each  unit  cost  should  have  his  approval  before  it  is  used  in 
the  actual  determination  of  the  reproduction  cost  of  a  property. 

The  subject  of  the  derivation  of  the  unit  costs  is  a  most  important  one. 
No  matter  how  carefully  the  inventory  may  be  prepared,  or  how  judi- 
ciously the  collateral  costs  and  intangible  values  determined,  the  appraisal 
is  of  little  value  unless  the  engineer  can  substantiate  his  unit  costs  under 
the  fire  of  the  cross  examination  he  is  almost  sure  to  be  subjected  to  by  the 
commission's  experts  or  by  the  representatives  of  opposing  factions. 

There  are  various  ways  of  checking  unit  costs  and  of  determining  their 


DETERMINATION  OF  FAIR  VALUE  23 

adequacy  for  use  in  specific  cases.  The  whole  subject  is  most  important, 
and  warrants  a  more  careful  consideration  than  can  be  given  in  this  prelim- 
inary survey  of  the  reproduction  cost  theory.  It  will  be  covered  more 
thoroughly  in  subsequent  chapters. 

63.  Collateral  Costs  and  Non-physical  Assets.  —  Those  closely 
allied  elements  of  collateral  cost  —  engineering  and  general  supervision 
during  construction,  general  legal  expense  during  construction,  taxes  and 
insurance  during  construction,  and  interest  during  construction  —  which 
cannot  be  adequately  provided  for  in  the  unit  costs,  should,  under  the  re- 
production theory,  be  determined  by  assuming  the  conditions  which  in  all 
probability  would  actually  exist  in  the  construction  of  a  hypothetical 
plant  exactly  similar  to  the  one  under  consideration  and  at  the  date  chosen 
for  appraisal. 

The  elements  of  intangible  value  —  cost  of  financing,  going  value,  etc. 
—  should  be  determined  in  a  similar  manner,  i.e.,  by  assuming  what  would 
probably  happen  if  the  plant  under  consideration  was  being  constructed 
and  prepared  for  operation  as  of  the  appraisal  date,  or  if  an  exactly  similar 
hypothetical  plant  was  being  constructed  at  the  same  location. 

64.  Present  Value.  —  Present  value  is  usually  only  an  element  in  the 
determination  of  fair  value.     Its  computation  is  necessarily  predicated 
either  upon  original  cost  or  reproduction  cost. 

Either  the  original  cost  or  the  reproduction  cost  and  the  accrued  de- 
preciation as  of  the  date  of  appraisal  have  first  to  be  determined  before 
present  or  depreciated  values  can  be  ascertained.  Take,  for  instance,  the 
case  of  a  telephone  pole.  If  we  wish  to  know  its  value  now,  we  must  first 
find  either  how  much  it  originally  cost,  or  how  much  it  would  cost  to 
replace  it  under  conditions  existent  at  the  present  time,  and  then  make 
a  deduction  from  the  result  for  its  present  condition. 

There  are  several  ways  by  which  we  could  arrive  at  the  present  value  of 
the  pole,  and  perhaps  the  consideration  of  these  possible  methods  may 
facilitate  a  clearer  understanding  of  the  subject  of  present  value. 

65.  Physical  Depreciation  computed  on  the  Straight  Line  Basis. 
—  Referring  to  the  definitions  in  Chapter  II,  it  will  be  remembered  that 
there  are  two  general  classes  of  depreciation,  physical  and  functional. 

Physical  depreciation  is  that  due  to  natural  causes,  age,  wear  and  tear. 
Functional  depreciation  is  that  due  to  lack  of  adaptability  to  normal  func- 
tion, either  through  inadequacy  or  obsolescence,  such,  for  instance,  as  the 
premature  removal  of  the  pole  due  to  the  building  of  a  subway  on  the  same 
street.  For  our  present  purpose,  however,  we  will  consider  only  physical 
depreciation. 

Let  us  suppose  that  we  know  that  poles  of  the  size  and  type  of  the  one 
under  consideration  cost  $10  in  place;  that  they  usually  last  about  ten 
years  and  have  a  certain  salvage  value  —  say,  for  anchor  logs  —  at  the 
end  of  their  useful  life.  If  we  assume  that  the  salvage  value  in  this  case  is 


24         TELEPHONE  RATES  AND  VALUES 

$1,  after  deducting  the  cost  of  removal  and  cutting  the  usable  portion  to  a 
suitable  size  for  anchor  logs  the  depreciated  or  wearing  value  will  be  $10 
less  $1,  or  $9. 

It  will  be  remembered  that  by  wearing  value  is  meant  that  portion  of 
the  total  cost  which  will  actually  pass  out  of  existence  during  the  useful 
life  of  the  pole. 

We  may  further  assume  that  the  wear  will  be  uniformly  distributed  over 
the  ten  years'  life,  and  that  the  pole  will  depreciate  in  value  one-tenth  of 
$9,  or  90  cents  each  year.  If  the  pole  is  five  years  old  at  the  date  of  ap- 
praisal, the  present  value  will  be  $10  —  ($0.90  X  5)  =  $5.50. 

Theoretically  an  amount  equal  to  the  annual  depreciation  —  90  cents 
in  this  case  —  would  be  set  aside  each  year  from  the  earnings  of  the  com- 
pany, and  the  fund  thus  accumulated,  together  with  the  salvage  value, 
would  give  an  amount  sufficient  to  finance  the  replacement  of  the  pole  at 
the  end  of  its  ten  years'  useful  life. 

In  reality,  at  compound  interest  the  amount  thus  set  aside,  together 
with  the  salvage  value,  will  more  than  equal  the  reproduction  cost.  This 
is  due  to  the  accumulation  of  the  interest.  It  is  this  fact  that  has  been 
responsible  for  the  development  of  what  is  known  as  the  "  sinking  fund 
method  of  accumulating  a  depreciationxreserve." 

Instead  of  setting  aside  one-tenth  of  the  depreciable  or  wearing  value 
each  year  we  would,  under  the  sinking  fund  method,  set  aside  annually 
an  amount,  predetermined  from  annuity  tables,  which  with  interest  com- 
pounded would  equal  the  wearing  value  at  the  end  of  the  ten  years'  useful 
life. 

66.  Sinking  Fund  Method  of  determining  Depreciation.  —  Under 
the  sinking  fund  method  of  accumulating  a  depreciation  reserve  it  may  be 
assumed  that  the  accrued  depreciation  at  any  given  time  exactly  equals 
the  amount  accumulated  at  that  time  in  the  depreciation  reserve. 

There  is  an  element  of  justice  in  this  assumption.  Especially  is  this  true 
of  the  outside  plant  of  a  telephone  company.  The  pole  and  wire  plant, 
for  instance,  in  a  property  that  has  not  been  properly  maintained  will  hang 
together  with  remarkable  tenacity  for  a  certain  length  of  time.  Then  it 
will,  apparently,  go  to  pieces  all  at  once  or  in  a  comparatively  short  time. 
Then,  again,  up  to  the  time  that  the  plant  actually  fails  there  is  a  certain 
element  of  value  in  the  very  fact  that  it  is  standing  and  is  giving  service, 
—  "service  value"  it  is  called. 

The  assumption  that  an  accrued  depreciation  is  always  equal  to  the 
amount  accumulated  in  the  depreciation  reserve  is  merely  one  of  conven- 
ience. Depreciation  may  not,  and  probably  does  not,  occur  at  the  rate  the 
reserve  is  accumulated.  As  a  matter  of  fact,  in  the  case  of  telephone  plants, 
at  least,  it  is  practically  impossible  to  determine  the  exact  rate  at  which 
wearing  value  decreases. 

The   fact  that,  where  physical  depreciation  alone  is  considered,  the 


DETERMINATION  OF  FAIR  VALUE  25 

rate  of  depreciation  follows  somewhat  the  same  curve  as  that  represent- 
ing the  accumulation  of  the  depreciation  reserve,  warrants  the  assump- 
tion that  the  accrued  depreciation  at  any  given  time  is  exactly  equal  to 
the  amount  accumulated  in  the  depreciation  reserve. 

In  this  way  a  simple  method  of  computing  present  value  is  afforded. 
From  annuity  tables  the  amount  which  should  be  in  reserve  may  be  com- 
puted. This,  deducted  from  the  original  or  reproduction  cost,  will  give 
the  present  value. 

Present  value,  as  determined  by  the  sinking  fund  method,  is  always 
higher  than  if  computed  on  the  straight  line  basis.  As  suggested  previously, 
this  fact  may  be  justified  in  view  of  the  element  of  service  value,  and  in 
view  of  the  more  rapid  deterioration  that  usually  takes  place  toward  the 
end  of  the  useful  life  of  the  telephone  plant. 

67.  Present  Value  as  determined  by  Inspection.  —  There  is  still 
another  method  of  determining  the  present  value  of  utility  properties.     It 
is  based  largely  upon  the  individual  judgment  of  the  field  inspectors  and 
appraisal  engineer.    This  method  is  particularly  adaptable  to  the  appraisal 
of  telephone  properties. 

Men  experienced  in  appraisement  work  can  "size  up"  the  condition  of 
the  various  elements  of  plant,  —  poles,  cross  arms,  wire,  etc.,  —  and  deter- 
mine a  " condition  percentage"  which  may  be  applied  directly  to  the 
reproduction  cost  to  obtain  the  present  value. 

The  determination  of  this  condition  percentage  by  competent  telephone 
experts  is  not  a  matter  of  guesswork.  It  represents  the  best  judgment  of 
the  field  inspectors  and  appraisal  engineer  supplemented  by  all  of  the 
available  data  as  to  the  age  and  junk  value  of  the  various  elements  of  the 
plant  which  is  under  consideration. 

Obviously  it  is  out  of  the  question  to  work  out  a  present  value  for  each 
pole,  each  cross  arm  and  each  pair  of  wires  by  either  straight  line  or  sinking 
fund  methods  of  depreciation.  The  inspection  method,  then,  presents  a 
reasonably  accurate  mode  of  determining  present  value  at  a  minimum  ex- 
penditure of  time. 

Present  value,  as  a  rule,  is  only  one  of  the  elements  in  fair  value.  As 
previously  stated,  its  derivation  is  dependent  upon  a  prior  determination 
of  either  reproduction  cost  or  original  cost. 

68.  Elements  to  be  carefully  considered.  —  In  concluding  this  pre- 
liminary resume  of  the  various  factors  which  may  enter  into  the  determina- 
tion of  fair  value  for  rate  purposes,  attention  is  once  again  called  to  the 
following  statement  of  the  Wisconsin  Railroad  Commission,  which  seems 
to  typify  the  attitude  of  courts  and  commissions  in  general :  — 

The  three  elements  of  greatest  importance  in  fixing  the  value  of  such  plants 
(public  utility  plants)  are:  the  original  cost,  the  cost  of  reproducing  the  plant  and 
the  present  value. 


26         TELEPHONE  RATES  AND  VALUES 

One  must  remember,  however,  that,  important  as  they  are,  these  three 
elements,  considered  either  individually  or  collectively,  do  not  furnish 
sufficient  data  for  the  final  determination  of  rate-base  value.  There  are 
still  other  elements  to  be  carefully  considered,  such  as  operating  expenses, 
revenue  and  net  income. 

These  items  may,  perhaps,  be  studied  in  detail  to  better  advantage  at 
a  later  date.  However,  the  accompanying  chart  (Fig.  2)  presented  in 
the  case  of  the  City  of  Columbus  et  al.  v.  Southern  Bell  Telephone  & 
Telegraph  Co.,  before  the  Railroad  Commission  of  Georgia,  will  be  found 
exceedingly  interesting,  and  may  pave  the  way  for  a  better  understand- 
ing of  subsequent  chapters.  It  shows  graphically  many  of  the  various 
elements  which  enter  into  the  determination  of  value  for  rate-making 
purposes. 

69.  Most  frequently  used  Basis  for  Fair  Value  Determination.  - 
Undoubtedly  "Cost  of  Reproduction  New"  is  the  most  frequently  used 
basis  for  determining  the  fair  value  of  public  utility  properties  for  rate- 
making  purposes,  perhaps  not  reproduction  cost  alone,  but  reproduction 
cost  taken  in  conjunction  with  reproduction  cost  less  depreciation,  or 
present  value. 

Before  taking  up  the  consideration  of  the  ways  and  means  which  may 
be  employed  in  the  determination  of  the  various  elements  of  reproduction 
cost,  it  may  be  well  to  pause  for  a  moment  and  consider  a  little  more  care- 
fully what  is  meant  by  fair  value. 

70.  Fair  Value  and  Rate-base  Value.  —  It  sometimes  happens  that 
value  for  rate-making  purposes  —  or  rate-base  value,  as  it  is  often  called  — 
and  fair  value,  are  not  one  and  the  same  thing.    Take,  for  instance,  the 
case  of  a  telephone  company  owning  a  valuable  piece  of  property  in  the 
heart  of  a  city,  and  using  this  property  for  a  purpose  entirely  incommensur- 
ate with  its  present  value  —  let  us  say  for  a  pole  yard.    Assume,  further, 
that  other  less  expensive  property,  so  located  as  to  render  it  equally  desir- 
able for  pole-yard  purposes,  is  available  for  immediate  use. 

Unless  the  company  is  holding  the  property  for  some  ulterior  purpose, 
closely  connected  with  its  function  as  a  public  servant,  there  is  a  grave 
question  as  to  whether  market  value  should  in  this  case  constitute  rate- 
base  value.  The  company  is  without  a  doubt  entitled  to  carry  the  full 
market  value  of  the  property  in  its  capital  account,  and  to  maintain  that 
the  market  value  represents  the  fair  value  for  any  purpose  save  rate-mak- 
ing, but  it  cannot,  in  justice  to  its  patrons,  include  the  full  market  value  in 
an  appraisal  for  rate  adjustment  purposes. 

Fair  value  and  rate-base  value  in  this  case  are  two  entirely  different 
things.  The  rate-base  value  would  in  all  probability  be  measured  by  the 
market  value  of  the  least  expensive  parcel  of  property,  qualified  by  location 
and  other  pertinent  considerations  to  furnish  the  company  with  pole-yard 
facilities  equal  to  those  afforded  by  the  property  under  discussion. 


DETERMINATION  OF  FAIR  VALUE 


27 


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*0  £    .  >  as  -a  >iJ5r^--; 


28         TELEPHONE  RATES  AND  VALUES 

On  the  other  hand,  if  the  company  can  show  a  real  need  for  the  property, 
within  a  reasonable  length  of  time,  for  some  purpose  more  nearly  in  keeping 
with  its  present  market  value,  —  such,  for  instance,  as  a  future  central 
office  site,  —  there  would  seem  to  be  ample  justification  for  including  the 
full  market  value  in  a  rate-base  appraisal. 


CHAPTER  IV 
DIRECT  CONSTRUCTION  COSTS 

71.  Direct  Construction  Costs.  —  Referring  again  to  the  total  value 
diagram  (Fig.  1,  Chapter  III),  it  will  be  seen  that  the  direct  construction 
costs  consist  of  the  cost  of  the  inventoriable  property,  an  allowance  for 
omissions  and  contingencies,  the  cost  of  purchasing  and  storing  material 
during  construction,  and,  in  some  cases,  an  allowance  for  contractor's 
profit. 

72.  Appraisal  of  the  Inventoriable  Property.  —  The  appraisal  of 
the  inventoriable  property  will  be  treated  in  more  detail  in  a  subsequent 
chapter.    For  the  present,  suffice  it  to  say  that  under  this  heading  falls  the 
bulk  of  the  detail  of  the  appraisal,  —  the  inventory,  the  preparation  of 
the  unit  costs,  and  the  clerical  work  of  compiling,  tabulating  and  sum- 
marizing the  resultant  data. 

73.  Duplication  in  taking  Inventory.  —  During  the  process  of  tak- 
ing inventory,  the  appraisal  engineer  is  constantly  harassed  with  the  fear 
that  his  field  inspectors  may  duplicate  portions  of  the  plant  or  leave  out 
parts  of  it  entirely. 

The  danger  of  duplication  may  be  largely,  if  not  entirely,'  eliminated  by 
a  proper  system  of  checking  and  cross-checking  the  individual  records  of 
the  inspectors  as  they  are  turned  in. 

74.  Omission  from  Inventory.  —  Omissions  from  inventory,  how- 
ever, cannot  be  entirely  guarded  against,  no  matter  how  carefully  the  in- 
ventory may  be  taken.    Especially  is  this  true  in  the  case  of  large  and 
widely  scattered  plants  where  the  records  are  inadequate.    Given  complete 
and  accurate  records,  the  taking  of  inventory  becomes  merely  a  process 
of  identifying,  checking  and  properly  tabulating  previously  acquired  data, 
and  the  chance  for  omissions  is  minimized.    But  even  in  this  case  it  fre- 
quently happens  that  errors  have  crept  into  the  records,  or  that  a  plant 
of  recent  construction  has  been  omitted  temporarily  from  the  records 
pending  the  completion  of  whatever  routine  happens  to  be  in  vogue  for 
the  reporting  of  completed  work. 

75.  Records  as  an  Inventory  Aid.  —  In  the  case  of  many  of  the 
smaller  telephone  companies  —  and  even  a  few  of  the  larger  ones  —  com- 
plete and  accurate  records  are  not  always  considered  a  necessity. 

The  thorough  familiarity  of  the  men  on  the  job  with  all  of  the  ins  and 
outs  of  the  plant  is  frequently  responsible  for  the  impression  among  those 
higher  up  that  records  are  an  expensive  nuisance,  entirely  unnecessary  to 
the  proper  maintenance  of  the  plant.  The  writer  has  even  known  of  cases 


30         TELEPHONE  RATES  AND  VALUES 

where  the  contention  "the  less  on  paper  the  better  "  has  been  supported 
by  the  argument  that  complete  and  accurate  records  tend  to  make  the 
men  slipshod,  that  they  constantly  refer  to  records  for  information  they 
should  carry  in  their  heads.  In  the  writer's  opinion  this  line  of  reasoning 
is  radically  wrong. 

While  a  good  working  knowledge  of  the  plant  is  absolutely  essential  to 
the  wire  chief,  plant  chief  and  their  immediate  assistants,  it  is  most  unfair 
to  expect  these  men  to  become  walking  plant  record  files.  Not  only  are 
the  faculties  of  the  men  themselves  unduly  overtaxed,  but  there  is  always 
the  danger  that  at  some  critical  time  —  such,  for  instance,  as  a  cable  fail- 
ure —  somebody  will  make  a  serious  mistake  that  will  cost  the  company 
time,  money  and  possibly  a  loss  of  public  confidence. 

Good  records  are  not  hard  to  obtain,  and  if  properly  designed  can  be 
maintained  at  a  surprisingly  low  cost.  An  expert  familiar  with  telephone 
construction,  maintenance  and  accounting  problems  can,  from  his  experi- 
ence in  meeting  similar  problems  in  the  past,  evolve  a  record  system  ade- 
quate to  meet  any  company's  requirements  at  a  comparatively  small  cost. 
The  initial  expense  will  be  offset  many  times  over  by  the  increased  effi- 
ciency which  will  undoubtedly  result  if  the  system  is  properly  maintained. 

76.  The  Field  Force  and  Omissions  from  Inventory.  —  In  the  case 
of  a  plant  with  inadequate  or  unreliable  records,  the  appraisal  engineer 
is  largely  dependent  upon  the  ability  and  integrity  of  his  field  inspectors 
for  accurate  results.    No  matter  how  conscientious  these  men  may  be, 
omissions  from  inventory  are  bound  to  occur.    The  reader  can  readily 
verify  this  statement  by  attempting  to  list  all  of  the  objects  in  a  room  and 
subsequently  rechecking  his  inventory.    He  will  doubtless  be  surprised  at 
the  number  of  perfectly  obvious  articles  missed  on  the  first  count. 

In  public  utility  inventory  work  it  is,  of  course,  out  of  the  question  to 
recheck  every  portion  of  the  inventory;  the  cost  would  be  prohibitive.  It 
is  possible,  however,  for  the  appraisal  engineer  to  verify  parts  of  the  work 
of  each  of  the  field  inspectors  at  frequent  intervals. 

In  every  large  appraisal  the  work  should  be  so  apportioned  that  the  ap- 
praisal engineer,  or  one  of  his  immediate  assistants,  can  give  a  large  part 
of  his  time  to  general  supervision  of  this  nature,  especially  during  the  in- 
ventory period.  In  this  way  he  not  only  can  remedy  defects  in  the  methods 
of  the  individual  inspectors  before  they  become  chronic,  but  he  can  get  a 
very  good  idea  as  to  what  allowance  should  be  made  for  the  item  of  omis- 
sions. 

77.  Contingency    Provisions    in    Appraisal    Work.  —  The    item 
"omissions"  consists  of  a  monetary  allowance  for  things  accidentally 
omitted  from  the  inventory.    The  word  "contingencies,"  as  used  in  ap- 
praisal parlance,  may  be  defined  as  the  amount  in  dollars  added  to  the  ap- 
praisal of  the  inventoriable  property  to  compensate  for  omissions  from  the 
unit  costs. 

It  has  been  the  experience  of  constructing  engineers  that  unless  some 


DIRECT  CONSTRUCTION  COSTS  31 

definite  provision  is  made  for  the  accidents,  delays  and  other  unforeseen 
contingencies  that  inevitably  occur  in  construction  work,  their  estimated 
costs  are  always  far  less  than  the  actual  cost  of  construction.  Similarly 
in  appraisal  work,  in  developing  the  unit  costs  we  may  include  every 
tangible  item  of  expected  cost,  and  still,  nine  times  out  of  ten,  the  re- 
sultant units  will  be  lower  than  the  probable  actual  cost  of  reproduc- 
tion. As  an  illustration,  consider  the  appraisal  of  an  underground  conduit 
system. 

In  deriving  the  unit  costs,  all  of  the  available  actual  performance  data 
are  reviewed.  Records  are  searched  for  evidence  of  unusual  subsurface 
conditions  which  tend  to  increase  construction  costs. 

The  resultant  unit  costs  should,  it  would  seem,  be  ample  to  give  the 
reproduction  cost  of  the  property.  Yet  if  the  actual  history  of  the  subway 
could  be  ascertained,  it  would  undoubtedly  develop  that  an  uncharted 
outcropping  of  rock  was  encountered,  or  an  exceptionally  intricate  tangle 
of  the  pipes  and  conduits  of  other  utilities  was  found  at  some  cross  street, 
necessitating  the  change  or  abandonment  of  the  original  plans,  and  in- 
volving a  veiy  much  greater  cost  than  could  possibly  have  been  foreseen 
in  compiling  the  unit  costs. 

It  is  just  such  contingencies  as  these  —  which  cannot  consistently  be 
provided  for  in  the  unit  costs,  but  which  inevitably  form  a  part  of  the  con- 
struction cost  of  a  large  utility  property  —  that  are  provided  for  under 
the  caption  "Contingencies." 

78.  Specific  Allowance  for  Inventory  Omissions.  —  Courts  and 
commissions  are  almost  universally  agreed  as  to  the  propriety  of  making 
a  specific  allowance  for  omissions.    Such  allowance  is  made  on  a  percent- 
age basis,  —  a  percentage  of  the  reproduction  cost  of  the  inventorial  prop- 
erty, —  usually  in  conjunction  with  an  allowance  for  contingencies. 

Allowances  for  omissions  and  contingencies  vary.  In  a  case  where  the 
records  are  known  to  be  accurate,  the  field  work  carefully  done,  and  the 
history  of  the  company's  construction  period  sufficiently  conclusive  to 
warrant  the  inclusion  of  a  liberal  allowance  for  contingencies  in  the  unit 
costs,  the  percentage  allowed  for  omissions  and  contingencies  should,  of 
course,  be  smaller  than  in  the  case  of  a  company  having  inaccurate  records 
and  little  or  no  knowledge  of  the  obstacles  encountered  in  the  process  of 
construction. 

The  usual  allowance  for  omissions  and  contingencies  ranges  from  4  to 
8  per  cent  of  the  total  cost  of  reproduction  of  the  inventoriable  portion  of 
the  plant. 

79.  Warehouse  and  Purchasing  Expense  during  Construction.  — 
Warehouse  and  purchasing  expense  may  be  computed  on  a  percentage 
basis,  or  may  be  determined,  perhaps  a  little  more  accurately,  by  assuming 
the  conditions  that  would  probably  exist  in  a  plant  of  the  size  and  type  of 
the  one  under  consideration,  estimating  in  detail  the  cost  of  purchasing, 
sorting  and  storing  the  material  to  be  used  in  plant  construction. 


32         TELEPHONE  RATES  AND  VALUES 

If  determined  on  a  percentage  basis,  the  amount  allowable  for  ware- 
house and  purchasing  expense  usually  varies  from  3  to  5  per  cent  of  the 
reproduction  cost  of  the  inventoriable  property,  depending  upon  the  exi- 
gencies of  the  case  in  question. 

The  appraisal  engineer  will  be  governed,  primarily,  by  the  allowances 
made  in  previous  similar  cases  by  the  commission  in  the  State  in  which 
the  property  is  located,  and  secondly,  by  his  own  experience  in  evaluating 
plants  analogous  to  the  one  under  consideration. 

80.  Estimation  Method  of  determining  Warehouse  and  Purchas- 
ing Expense.  —  The  other  method  of  determining  warehouse  and  pur- 
chasing expense  involves  an  estimate  of  the  actual  expenditures  which 
would  probably  be  incurred  in  purchasing,  sorting  and  storing  the  material 
used  in  plant  construction.  In  building  up  this  estimate  the  appraisal  en- 
gineer is  governed  largely  by  his  previous  experience  in  constructing 
plants  of  a  similar  type,  modified  to  meet  the  individual  requirements  of 
the  case  in  hand. 

He  must  first  determine  how  long  it  will  take  to  build  the  plant,  and 
then  ascertain  the  probable  periods  of  greatest  purchasing  activity. 

Other  factors  to  be  considered  are :  the  most  desirable  location  for  main 
and  branch  storehouses;  pole  yards  so  situated  as  to  be  accessible  by  rail 
and  at  the  same  time  provide  short  hauls  in  distributing  the  poles  for  erec- 
tion; and  the  provision  of  a  clerical  and  stenographic  force  for  handling 
the  routine  incidental  to  the  purchasing  and  distribution  of  the  material. 

All  data  as  to  salaries  and  rentals  must,  of  course,  be  determined  as 
accurately  as  possible  by  reviewing  conditions  in  the  locality  at  the  date  of 
appraisal. 

The  following  estimate  is  for  a  plant  of  about  5,000  subscribers  scattered 
over  a  rather  large  area,  with  exchanges  located  in  several  small  towns. 
The  period  of  actual  construction  has  been  assumed  to  be  one  and  one-half 
years. 

One  purchasing  agent  who  will  have  charge  of  the  purchasing  and  the 

handling  of  all  material  and  supplies,  1£  years  at  $1,200,  .  .  .  $1,800 
One  storekeeper  in  charge  of  the  receipt  and  distribution  of  stock,  1£ 

years  at  $900,                                                                                                      .  1,350 

One  stenographer,  1|  years  at  $900,      .                                                             .  1,350 

One  clerk,  1  i  years  at  $600,           ...  900 

Three  assistant  storekeepers,  1 1  years  at  $720  each,         .                              .  3,240 

One  permanent  warehouse,  l£  years  at  $300,           .          .           ,  450 

Two  permanent  pole  yards,  1J  years  at  $120,  360 

Five  temporary  pole  yards,  j  year  at  $120  each,     .  300 

Five  temporary  warehouses,  £  year  at  $120  each,   .  300 
Four  temporary  sheds  in  pole  yards  for  use  in  fitting  cross  arms,  storing 

hardware,  etc.,  1  year  at  $100  each, 400 

One  team  for  sorting  poles,  100  days  at  $5,    .  500 

One  automobile  for  use  of  purchasing  agent  and  storekeeper,  .  400 

Miscellaneous,  —  expenses,  car  fare,  stationery,  telegrams,  etc.,        .  350 

Total  warehouse  and  purchasing  expense  during  construction,  .           .  $11,700 


DIRECT  CONSTRUCTION  COSTS  33 

81.  Tools  and  Tool  Expense  during  Construction.  —  The  tools 
used  in  the  construction  of  a  telephone  plant  are  constantly  in  need  of 
repair,  and  frequently  several  complete  sets  are  worn  out  in  the  construc- 
tion of  a  single  plant.    All  of  the  expense  involved  in  the  repair  and  replace- 
ment of  the  tool  equipment  during  construction  is  necessarily  a  part  of 
the  cost  of  the  property,  but  one  which  for  obvious  reasons  cannot  readily 
be  allocated  to  the  units. 

In  a  reproduction  cost  appraisal,  the  cost  of  the  tools,  and  tool  expense 
during  construction,  should  be  estimated  by  the  appraisal  engineer,  basing 
his  estimate  upon  previous  experience  in  the  construction  of  plants  of  the 
size  and  nature  of  the  one  under  consideration. 

82.  Example  of  Tools  and  Tool  Expense.  —  The  following  is  an  ex- 
ample of  tools  and  tool  expense  as  computed  for  a  plant  serving  about 
50,000  subscribers  located  in  a  city  of  400,000  inhabitants :  — 

The  inventory  of  tools  and  tool  equipment,  as  of  the  date  of  appraisal, 
showed  that  about  $50,000  (reproduction  cost)  of  tools  were  required  to 
maintain  the  plant  and  make  such  periodic  extensions  as  might  be  neces- 
sary to  carry  on  the  company's  business. 

It  was  estimated  that  the  plant  construction  would  be  completed  in 
about  four  and  one-half  years,  requiring  a  complement  of  tools  similar  to 
the  one  at  hand  at  the  date  of  appraisal,  and  that  the  entire  original  tool 
equipment  would  be  used  before  the  end  of  the  construction  period.  It 
was  further  estimated  that  the  annual  cost  of  repairing  tools  would  amount 
to  about  10  per  cent  of  their  reproduction  cost. 

At  the  end  of  the  construction  period  it  is  probable  that  a  portion  of 
the  second  complete  equipment  would  be  in  a  condition  warranting  its 
use  as  a  nucleus  for  the  tool  equipment  of  the  operating  plant.  The  sal- 
vage value  of  this  residue  should,  of  course,  be  deducted  from  the  reproduc- 
tion cost  of  the  tools  and  tool  equipment  during  construction,  for  the 
obvious  reason  that  the  tool  equipment  of  the  operating  plant  has  already 
been  included  in  the  appraisal  of  inventoriable  property. 

On  this  basis  the  estimate  of  tools  and  tool  expense  becomes:  — 

Reproduction  cost  of  tools  and  tool  equipment  included  in  inventory,     .  $50,000 

Reproduction  cost  of  tools  and  tool  equipment  used  in  plant  construction,  100,000 
Maintenance  of  tools  and  tool  equipment  during  construction  period,  10 

per  cent  for  4|  years,      .          .          .          .          .          .          .          .          .  45,000 


Total,        .  ...    $145,000 

Salvage  value  of  tools  and  tool  equipment  in  hand  at  end  of  construction 

period, 25,000 


Total  tools  and  tool  equipment  during  construction,        .          .          .    $120,000 

83.  Contractors'  Profit.  —  It  sometimes  happens  that  a  part  or  all 
of  a  utility  corporation's  plant  can  be  more  economically  constructed  by 


34         TELEPHONE  RATES  AND  VALUES 

subletting  the  work  to  a  general  contractor  than  if  the  company  attempted 
to  do  the  work  itself.  In  the  telephone  field,  however,  operating  compa- 
nies usually  prefer  to  do  their  own  construction  work,  although  many  of 
the  older  independent  plants  were  originally  built  on  a  contract  basis. 

In  making  a  reproduction  cost  appraisal,  the  appraisal  engineer  should 
constantly  bear  in  mind  the  viewpoint  of  the  prospective  builders  of  a 
similar  plant  under  conditions  existent  at  the  date  of  appraisal. 

In  some  instances  it  may  develop  that  parts  of  the  plant  can  be  more 
economically  built  by  a  local  contractor  than  by  the  company  itself. 
Take,  for  instance,  the  case  of  underground  conduit,  where  comparatively 
small  amounts  are  involved.  It  frequently  happens  that  a  local  contractor 
familiar  with  electric  light  construction  can,  under  the  supervision  of  the 
company's  engineer,  do  the  work  much  cheaper  than  it  could  possibly  be 
done  by  the  company. 

In  cases  of  this  kind  the  unit  costs  should  be  built  up  in  exactly  the  man- 
ner they  would  be  if  the  company  itself  were  equipped  to  do  the  work  on 
an  economical  basis,  —  including  only  the  material  and  direct  labor  of 
construction,  —  and  a  separate  allowance  made  for  the  contractor's  profit. 

Contractor's  profit  is  usually  estimated  at  10  per  cent  of  the  reproduc- 
tion cost  of  the  portion  of  the  plant  involved  when  the  company  assumes 
the  responsibility  for  contingencies,  and  at  from  10  to  50  per  cent  when 
the  contractor  assumes  all  responsibility.  The  former  basis  is  probably 
the  more  prevalent.  The  reproduction  cost  to  which  the  10  per  cent  is 
applied  should  include  an  allowance  for  omissions,  contingencies,  ware- 
house and  purchasing  expense  during  construction. 


CHAPTER  V 
COLLATERAL   CONSTRUCTION  COSTS 

84.  Relation  of  Collateral  Construction  Costs  to  Cost  of  Phys- 
ical Property.  —  The  collateral  construction  costs,  it  will  be  remembered, 
are  so  closely  allied  to  the  direct  construction  costs  as  to  warrant  their 
inclusion  with  the  latter  under  the  heading  "Cost  of  physical  property." 
They  are  really  part  and  parcel  of  the  cost  of  physical  property,  and  it  is 
only  for  convenience  that  they  are  not  included  in  the  unit  costs. 

Obviously,  such  items  as  general  and  legal  expense,  engineering  and 
general  supervision,  referring  as  they  do  to  practically  the  entire  property, 
can  be  more  readily  determined  by  considering  the  problem  as  a  whole 
rather  than  by  trying  to  allocate  these  items  to  the  various  unit  costs  of 
pole  line,  aerial  cable,  etc.,  construction. 

In  many  of  the  more  recent  appraisals,  however,  no  attempt  has  been 
made  to  segregate  the  direct  and  collateral  construction  costs.  Items  of 
collateral  cost  in  these  cases  are  given  in  the  proper  order  after  the  items 
of  direct  cost,  without  the  introduction  of  the  distinctive  headings  of 
" Direct  construction  costs"  and  "Collateral  construction  costs."  In  this 
way  the  close  bond  between  these  two  subdivisions  of  total  physical  cost 
is  emphasized. 

85.  Steps  in  the  Construction  of  a  Public  Utility  Property.  — 
Before  taking  up  the  discussion  of  the  various  elements  of  collateral  costs, 
let  us  consider  for  a  moment  just  what  happens  prior  to,  and  during  the 
early  stages  of,  the  construction  of  a  utility  property. 

First  comes  the  conception  of  the  idea.  If  the  plant  under  consideration 
is  a  telephone  plant,  some  practical  telephone  man  usually  first  sees  the 
opportunity  for  a  new  company.  Or  it  may  be  that  a  group  of  prominent 
citizens,  dissatisfied  with  the  service  of  the  existing  company,  conceives 
the  idea  of  starting  a  competitive  enterprise  financed  by  local  capital. 

In  either  case  the  next  step  will  be  the  discussion  of  the  project  with 
others  who  may  be  usefully  interested,  especially  those  who  may  be  of 
direct  financial  assistance. 

If,  after  conferences,  the  project  still  seems  feasible,  engineers  will  be 
employed  to  make  rough  estimates  of  costs,  and  to  outline,  in  a  general 
way,  the  scope  of  a  property  adequate  to  give  the  desired  service.  The 
consideration  of  the  engineer's  report  will  probably  necessitate  a  number 
of  conferences,  and  possibly  several  inspection  trips. 

If  the  financial  backers  are  favorably  impressed  with  the  findings  of  the 
engineering  staff,  the  next  step  will  be  the  employment  of  legal  counsel  to 
take  the  preliminary  measures  toward  obtaining  the  consent  of  the  State 
public  service  commission,  the  securing  of  municipal  franchises,  and  for 
general  advice  in  whatever  other  organization  problems  may  arise. 


36         TELEPHONE  RATES  AND  VALUES 

In  some  States  a  "certificate  of  public  convenience  and  necessity"  is 
required  before  a  new  utility  can  enter  the  field.  In  other  words,  the  pro- 
moters have  to  prove  to  the  State  public  utility  commission  that  there  is 
a  real  need  for  a  new  utility  corporation  before  the  commission  will  consent 
to  its  establishment. 

After  the  consent  of  the  State  commission  has  been  obtained,  the  work 
of  securing  a  municipal  franchise  is  taken  up  in  earnest.  This,  as  a  rule, 
is  a  rather  serious  problem,  involving  many  conferences  and  a  considerable 
loss  of  time.  Factions  of  the  city  government  may  have  to  be  conciliated, 
for  political  or  other  reasons. 

Next  comes  the  organization  of  a  corporation  to  take  over  the  franchise 
and  build  the  plant,  the  acquisition  of  the  necessary  real  estate,  and  the 
preparation  of  specific  engineering  and  architectural  plans  for  the  construc- 
tion of  the  plant. 

From  the  foregoing  it  will  be  seen  that  very  appreciable  expenditures 
have  to  be  made  before  a  single  item  of  the  inventoriable  portion  of  the 
plant  is  brought  into  existence.  No  fair-minded  person  can  for  a  minute 
question  that  these  expenditures  are  just  as  much  a  part  of  the  cost  of 
the  property  as  the  cost  of  placing  poles  or  stringing  wire. 

All  of  these  expenditures,  with  the  exception  of  the  cost  of  securing 
franchise  (other  than  legal  costs),  and  the  cost  of  raising  money  for  plant 
construction,  fall  under  the  collateral  costs. 

86.  General  and  Legal  Expense  during  Construction.  —  Taking 
up  the  items  of  collateral  cost  in  the  order  in  which  they  would  naturally 
occur,  we  have,  first,  the  general  and  legal  expense  during  construction. 
This  item  includes  salaries  of  general  executives,  —  such  as  the  chief  ex- 
ecutive, treasurer,  auditor,  etc.,  —  general  office  expenses,  and  retainer  for 
legal  counsel.    These  should  be  estimated  by  the  appraisal  engineer  from 
his  general  experience  in  similar  cases. 

87.  Estimate  of  General  and  Legal  Expense.  —  An  estimate  of  the 
general  and  legal  expense  incurred  in  the  construction  of  a  property  de- 
signed to  serve  between  50,000  and  60,000  subscribers  is  presented  which 
shows  what  is  included  under  this  heading.    It  was  assumed  that  the  con- 
struction of  the  plant  would  take  about  five  years.    The  first  six  months 
of  the  construction  period  will  be  required  for  the  preliminary  negotiations, 
and  the  remaining  four  and  one-half  years  for  actual  construction. 

Office  rent  (2,000  square  feet)  5  years  at  $1,000,  .  .  $5,000 

Salary,  chief  executive,  5  years  at  $10,000,  .          .  .  50,000 

Salary  of  auditor-treasurer,  5  years  at  $4,000,       .  .  20,000 

Retainer  for  legal  counsel,  5  years  at  $6,000,         .  30,000 

Cashier  paymaster,  4£  years  at  $2,000,         .          .  9,000 

Bookkeeper,  5  years  at  $1,500,    .  7,500 

Average  of  ten  clerks  and  stenographers,  5  years  at  $900  each,  .          .  45,000 

Office  expenses,  —  supplies,  stationery,  telephone,  telegraph,  etc.,  5  years 

at  $1,500,      ...  .  7.500 

Total  general  and  legal  expense  during  construction,        .  .          .  $174,000 


COLLATERAL  CONSTRUCTION  COSTS        37 

88.  Engineering  and  General  Supervision  during  Construction. 

-  The  cost  of  engineering  is  usually  estimated  as  a  percentage  of  the  cost 
of  the  inventoriable  property.  The  allowance  ranges  from  3  to  6  per  cent, 
depending  mainly  upon  the  size  of  the  plant.  In  very  small  installations 
one  man  may  handle  both  engineering  and  general  supervision.  In  cases 
of  this  kind  an  allowance  of  5  or  6  per  cent  is  usually  sufficient  to  care  for 
both  of  these  items. 

In  the  construction  of  large  plants  a  separate  organization  is  required 
for  the  general  supervision.  The  unit  costs  include  only  cost  of  direct 
supervision,  —  that  of  the  gang  foremen  in  charge  of  the  various  jobs. 

All  supervision  between  the  gang  foremen  and  the  executive  staff  is 
cared  for  under  the  heading  "General  supervision/'  not  only  the  salaries 
of  the  general  superintendent,  general  foremen  and  their  assistants,  but  all 
of  the  miscellaneous  expenditures  incidental  to  their  work  which  may  be 
incurred  in  the  construction  of  a  large  utility  property. 

89.  Illustration  of  Cost  of  General  Supervision.  —  The  estimate 
which  follows,  of  the  cost  of  general  supervision,  is  for  the  plant  referred 
to  under  general  and  legal  expense,  serving  between  50,000  and  60,000 
subscribers. 

The  construction  period  is  assumed  to  extend  over  five  years,  the  first 
six  months  of  which  will  be  largely  devoted  to  preparatory  work.  It  will, 
however,  be  necessary  to  have  the  general  superintendent,  his  chief  clerk 
and  certain  others  of  the  supervisory  staff  on  hand  throughout  the  entire 
period,  as  indicated  in  the  following  schedule :  — 

Salary  of  general  superintendent  of  construction,  5  years  at  $4,000,          .  $20,000 

Salary  of  chief  clerk,  5  years  at  $1,800, 9,000 

Salary  of  chief  stenographer,  5  years  at  $1,000,     .....  5,000 
Additional  stenographers,  an  average  of  3  for  4  years  at  $600  each  (these 
stenographers  will  be  required  for  typing  orders   and   attending  to 

routine  correspondence),           ........  7,200 

Pay-roll  clerk,  4£  years  at  $900, .  4,050 

File  clerk,  4i  years  at  $600, 2,700, 

General  foreman  of  aerial  construction,  4£  years  at  $2,100,     .          .          .  9,450 

General  foreman  of  underground  construction,  4£  years  at  $2,100,            .  9,450 

General  foreman  of  cable  installation,  4  years  at  $2,100,         .          .          .  8,400 

General  foreman  of  cable  splicing,  4  years  at  $2,100,      .          .          .          .  8,400 

General  foreman  of  equipment,  4  years  at  $2,400,           .          .          .          .  '  9,600 
Assistant  foreman  of  equipment   (in  charge  of  station  installation),   3 

years  at  $2,100, 6,300 

Rent  of  office  space  (1,500  square  feet),  5  years  at  60  cents  a  square  foot 

per  annum,  ...........  4,500 

Office  supplies,  stationery,  telephone  and  telegraph,  car  fare,   automo- 
bile usage,  etc., .  14,950 


Total  general  supervision  during  construction,         ....    $119,000 


38         TELEPHONE  RATES  AND  VALUES 

90.  Computation  of  Taxes,  Insurance  and  Interest  during  Con- 
struction. —  Both  taxes  and  insurance  during  the  construction  period 
form  a  very  real  part  of  the  total  cost  of  building  a  utility  property.    How- 
ever, in  computing  these  elements  of  cost  there  is  one  point  which  must 
be  clearly  borne  in  mind :  as  soon  as  any  portion  of  the  plant  is  put  into 
actual  service,  both  taxes  and  insurance  for  that  portion  cease  to  be  a 
construction  expense.    They  must  be  cared  for  in  exactly  the  same  way 
that  they  would  be  in  the  case  of  any  regularly  operating  plant,  as  a  de- 
duction from  gross  earnings.    The  same  thing  may  be  said  of  interest 
during  construction. 

In  computing  these  three  items  —  taxes,  interest  and  insurance  —  it  is 
necessary  to  first  approximate  as  closely  as  possible  the  construction 
schedule  that  would  probably  be  followed  in  the  building  of  the  plant,  and 
then  to  determine  the  momentary  equivalent,  in  terms  of  reproduction 
cost,  of  the  plant  constructed,  or  in  process  of  construction,  and  of  the 
plant  in  service,  during  each  subdivision  of  the  construction  period. 

These  subdivisions  are  usually  taken  as  of  six  months'  duration  (in  the 
case  of  a  small  plant,  a  three  months'  period  may  prove  more  suitable). 
A  five-year  construction  period  would  therefore  be  subdivided  into  ten 
periods  of  six  months  each,  and  the  exact  status  of  construction  in  progress 
ascertained  for  each  of  these  subperiods. 

91.  The  Construction  Schedule.  —  The  determination  of  the  sched- 
ule of  construction  expenditures  is  not  as  difficult  a  problem  as  it  may  at 
first  appear.    The  appraisal  engineer,  from  his  familiarity  with  the  condi- 
tions actually  existing  during  the  construction  of  other  similar  plants,  can 
make  a  pretty  accurate  guess  at  the  probable  progress  of  construction  in 
the  case  in  hand. 

During  the  first  six  months  little  or  no  construction  work  will  be  under- 
taken in  the  building  of  a  telephone  plant  large  enough  to  require  five  years 
for  completion.  During  the  second  six  months  pole  work  will  be  actually 
undertaken,  and  in  the  third  and  fourth  periods  carried  on  at  a  rapid  rate. 

As  soon  as  a  reasonable  number  of  poles  have  been  erected,  wire  and 
aerial  cable  crews  will  start  work.  Subway  work  should  be  started  early 
in  the  construction  period  so  as  to  insure  its  completion  long  enough 
before  that  of  the  aerial  plant  to  enable  underground  cable  crews  to  finish 
their  work  on  schedule  time. 

In  a  multi-office  exchange,  work  on  the  main  office  —  the  office  in  the 
city's  commercial  center  —  will,  of  course,  be  expedited  as  much  as  possible 
so  as  to  give  the  company  a  foothold  in  the  community  at  the  earliest 
possible  moment.  Work  of  installing  subscribers'  stations  and  drop  wire 
will  not  be  started  until  rather  late  in  the  construction  period.  It  will 
probably  overlap  well  into  the  period  of  actual  operation. 

With  these  points  in  mind,  the  appraisal  engineer  can  lay  out  a  plausible 
construction  schedule,  and  decide  what  proportion  of  the  total  of  each  type 


COLLATERAL   CONSTRUCTION  COSTS 


39 


of  plant  (poles,  cable,  wire,  etc.)  will  be  installed  during  each  of  the  six 
months'  periods.  He  can  estimate  the  corresponding  proportion  of  the  total 
reproduction  cost  that  will  be  expended  during  each  period,  and  the  propor- 
tion of  the  total  contemplated  plant  put  into  service  during  each  period. 

92.  Computation  of  Taxes  during  the  Construction  Period.  —  In 
computing  the  taxes,  the  prevalent  tax  rates  for  each  tj^pe  of  plant  should 
be  ascertained  from  an  examination  of  the  company's  tax  statement  for 
the  several  years  preceding  the  appraisal,  and  also  the  ratio  of  assessed  to 
book  values.  The  tax  rates  so  determined  will  be  applied  to  the  reproduc- 
tion cost  of  the  taxable  property  during  each  six  months'  period. 

The  reproduction  cost  of  the  taxable  property  for  each  period  will,  of 
course,  be  the  total  reproduction  cost  of  plant  installed  to  date  —  including 
that  placed  during  the  period  under  consideration  —  less  the  reproduction 
cost  of  the  plant  already  giving  service  at  that  date. 

The  rate  to  be  applied  for  each  six  months'  period  will  be  half  of  the 
annual  rate,  or,  more  properly,  taxes  may  be  computed  for  the  entire  year, 
using  the  full  cost,  and  pro-rated  over  the  six  months'  periods.  As  an 
illustration,  the  tax  rate  for  a  certain  property  was  found,  from  an  exam- 
ination of  past  records,  to  be  $3.03  for  every  $100  of  plant  value.  It  was 
further  found  that  for  the  several  years  preceding  the  appraisal  the  assessed 
value  of  the  property  was  only  34.2  per  cent  of  the  book  value. 

The  actual  tax  rate  applicable  to  the  reproduction  cost  is,  then,  34.2 
per  cent  of  $3.03,  or  $1.036  per  $100  of  reproduction  cost.  The  computa- 
tion of  taxes  is  given  in  Fig.  3. 


Repro- 

PERIOD. 

duction 
Cost  of 
Plant 

Repro- 
duction 

Repro- 
duction 
Cost  of 

Amount 
for 

Taxes 
for 

Taxes 
to 

during 
Con- 

Cost 
to  Date. 

Plant  in 
Service. 

Taxes. 

Period. 

Date. 

struction. 

First  year  :  — 

First  half  

$101,808 

$101,808 

_ 

$101,808 

$527 

$527 

Second  half,         .... 

653,323 

755,131 

- 

755,131 

3,912 

4,439 

Second  year:  — 

First  half,    

700,336 

1,455,467 

_ 

1,455,467 

7,539 

11,978 

Second  half  

960,321 

2,415,788 

- 

2,415,788 

12,514 

24,492 

Third  year  :  — 

First  half  

1  076*143 

3,491,931 

_ 

3,491,931 

18,088 

42,580 

Second  half,         .... 

988,101 

4,480,032 

- 

4,480,032 

23,207 

65,787 

Fourth  year:  — 

First  half,    

1,033,927 

5,513,959 

$4,390,253 

1,123,706 

5,821 

71,608 

Second  half,         .... 

808,367 

6,322,326 

5,399,113 

923,213 

4,782 

76,390 

Fifth  year:  — 

First  half,    

594,379 

6,916,705 

6,111,573 

805,132 

4,171 

80,561 

Second  half,          .... 

627,648 

7,544,353 

6,789,686 

754,667 

3,909 

84,470 

Total  taxes  during  construction, 

- 

- 

- 

- 

- 

$84,470 

FIG.  3.  —  Illustration  of  the  computation  of  taxes  during  construction. 


40         TELEPHONE  RATES  AND  VALUES 

93.  Details  of  Tax  Computations.  —  That  the  method  of  derivation 
of  the  taxes  as  part  of  the  reproduction  cost  may  be  clearly  understood, 
the  computations  for  one  period  —  the  first  half  of  the  fourth  year  — 
are  given  in  detail:  — 

Reproduction  cost  of  plant  installed  during  period,     ....     $1,033,927 
Reproduction  cost  of  plant  previously  installed,          ....      4,480,032 


Total  reproduction  cost  of  plant  installed  to  date,  .  .  .  $5,513,959 
Reproduction  cost  of  plant  giving  service  at  date,  ....  4,390,253 
Amount  on  which  taxes  are  to  be  based,  $5,513,959  less  $4,390,253,  or,  1,123,706 

Tax  rate  for  six  months'  period  equals :  — 

Annual  rate      $1.036 

=  — - —  =  $0.518  per  each  $100  of  valuation. 

Taxes  for  period  =  $U23'706  X  0.518  =  $5,821. 
100 

In  the  case  under  consideration  the  State  taxed  public  utilities  only  on 
non-operating  property  and  real  estate.  However,  in  many  States  utility 
corporations  are  subject  to  other  taxes,  such  as  taxes  on  franchises  and 
capital  stock. 

94.  Computation  of  Taxes  direct  from  Cost  of  Inventoriable 
Property.  —  Taxes  are  sometimes  computed  directly  from  the  cost  of  the 
inventoriable  property  without  assuming  a  construction  schedule.    In  the 
opinion  disapproving  the  plan  of  reorganizing  the  Third  Avenue  Railway 
Company,  dated  July  29,  1910,  the  Public  Service  Commission  of  New 
York,  First  District,  ruled  as  follows :  — 

Mr.  Floy  estimates  taxes  at  one-half  of  1  per  cent.  This  amount  includes, 
apparently,  every  kind  of  tax  from  capital  stock  tax  to  franchise  tax.  It  does 
not  seem  to  be  unreasonable,  and,  except  so  far  as  it  includes  taxes  in  connection 
with  the  corporate  organization  of  the  old  company,  it  should  be  allowed. 

The  former  method,  however,  seems  the  more  logical,  and  is  much  more 
likely  to  meet  with  favor  in  the  eyes  of  courts  and  commissions  in  general. 

95.  Insurance  Expense  during  Construction.  —  There  are  three 
sources  of  insurance  expense  ordinarily  encountered  during  the  construc- 
tion of  a  telephone  property:    fire  insurance, — buildings,  central  office 
equipment,  furniture  and  fixtures,  tools  and  that  portion  of  the  construc- 
tion material  carried  in  the  storeroom  during  each  of  the  construction 
periods;  employers'  liability  insurance;  and  insurance  against  injuries  to- 
the  general  public. 

Insurance,  like  taxes,  should  be  estimated  on  a  periodic  basis  —  the 
periods  are  usually  assumed  to  be  six  months  each  —  and  the  reproduction 
cost  of  plant  installed  less  the  reproduction  cost  of  plant  in  service  ascer- 


COLLATERAL  CONSTRUCTION  COSTS  41 

tained  for  each  period  and  used  as  a  basis  for  computing  the  cost  of  insur- 
ance. 

96.  Estimation  of  Fire  Insurance  Expense.  —  In  estimating  fire 
insurance  prevalent  rates  for  similar  risks,  and  rates  paid  for  the  several 
years  preceding  the  appraisal  on  the  property  under  consideration,  should 
be  reviewed  in  determining  a  fair  insurance  rate  for  appraisal  purposes.  It 
should  also  be  remembered  that  insurance  rates  are  rarely  applied  to  the 
full  value  of  the  property  insured. 

An  examination  of  the  company's  insurance  records  for  the  several 
years  preceding  the  appraisal  should  give  the  ratio  of  insured  value  to 
book  value.  This  ratio  may  be  applied  to  the  reproduction -cost  of  the 
insurable  property  to  get  a  proper  insurance  base.  An  illustration  of  the 
method  followed  in  computing  fire  insurance  for  a  comparatively  large 
telephone  plant  is  given  in  Fig.  4. 


42 


TELEPHONE  RATES  AND  VALUES 


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COLLATERAL  CONSTRUCTION  COSTS 


43 


97.  Liability  Insurance  in  the  Actual  Construction  Work.  — 

Liability  insurance  in  actual  construction  work  is  based  upon  the  pay  roll 
of  the  construction  forces.  Hence,  in  computing  the  cost  of  "liability 
insurance  during  construction,"  we  have,  first,  to  determine  the  proportion 
of  the  total  reproduction  cost  involving  labor  items  only,  and  then  to  ap- 
portion this  amount  over  the  construction  period. 

A  review  of  the  unit  costs  for  the  various  types  of  plant  will  render  pos- 
sible a  reasonably  accurate  estimate  of  the  ratio  of  labor  costs  to  total 
costs.  This  ratio  applied  to  the  construction  schedule  will  give  a  proper 
base  for  use  in  determining  liability  insurance  during  each  period. 

The  illustration  which  follows  is  taken  from  a  recent  appraisal  of  a  tele- 
phone property.  It  will  be  noted  that  liability  insurance  was  not  allowed 
on  subscriber's  station  installations,  as  there  is  practically  no  danger  of 
injuring  life  or  property  in  installing  a  telephone  on  private  property;  for 
that  matter,  there  is  very  little  danger  of  injury  to  the  installer  himself. 
But  the  additional  cost  involved  is  comparatively  small,  and  most  com- 
panies feel  that  it  is  better  to  be  on  the  safe  side  in  the  matter  of  employees' 
insurance. 

98.  Example  of  Computation  of  Liability  Insurance.  —An  illus- 
tration of  the  method  used  in  computing  liability  insurance  is  given  in 
Fig.  5.     In  this  table  liability  insurance  was  calculated  on  the  basis  of  the 
working  force  involved  in  the  construction  of  the  plant,  exclusive  of  gen- 
eral supervision.    The  rate  for  outside  employees  is  $5.25  per  $100  of  pay 
roll.    The  rate  for  the  general  public  is  $2.04  per  $100  of  pay  roll.    The 
cost  of  liability  insurance  for  employees  and  general  public  (Fig.  5)  was 
estimated  on  this  basis. 


PERIOD. 

Outside 
Employees. 

Substation 
Installers. 

Insurance 
Cost. 

First  year:  — 

Second  half  

$38,874 

- 

$2,834 

Second  year  :  — 

First  half,  
Second  half,        

110,093 
144,602 

- 

8,026 
10,541 

Third  year:  — 

First  half,  . 
Second  half  

157,180 
150,667 

47,259 

11,458 
13,465 

Fourth  year:  — 

First  half  
Second  half,        

172,378 
142  178 

41,806 
26  856 

14,761 

11  775 

Fifth  year:  — 

First  half  

102  947 

31  408 

9  154 

Second  half,        

100,178 

19,128 

8,307 

Total  liability  insurance  during  'construction, 

- 

- 

$90,321 

FIG.  5. — The  method  used  in  computation  of  liability  insurance 


44         TELEPHONE  RATES  AND  VALUES 

Liability  insurance  is  sometimes  estimated  on  a  flat  basis,  as  a  percentage 
of  the  labor  cost  of  the  insurable  items.  On  this  basis  an  allowance  of 
three-fourths  of  1  per  cent  of  the  estimated  labor  cost  for  employees'  in- 
surance, and  three-fourths  of  1  per  cent  for  public  insurance,  or  a  total  of 
1|  per  cent  for  liability  insurance,  is  not  an  unusual  allowance. 

99.  Interest  during  Construction.  —  Courts  and  commissions  are 
generally  agreed  that  the  interest  on  the  capital  used  in  constructing  a 
utility  property  is  an  allowable  element  of  the  total  reproduction  cost 
during  the  period  that  the  capital  is  lying  idle.    As  soon,  however,  as  any 
portion  of  the  plant  is  put  into  active  service,  interest  on  the  capital  in- 
vested in  that  portion  of  the  plant  ceases  to  be  an  element  of  cost,  and 
becomes  a  part  of  the  company's  operating  expenses. 

In  the  case  of  Pioneer  Telephone  &  Telegraph  Co.  v.  Westhaven  (118 
Pac.  354)  the  Supreme  Court  of  Oklahoma  rendered  the  following 
opinion:  — 

The  commission  refused  to  allow  it  (interest  during  construction)  because  it 
did  not  consider  it  a  proper  element  of  reproductive  value. 

Counsel  for  the  commission,  however,  at  the  oral  argument  before  this  court 
conceded,  and  we  think  properly,  that  there  is  no  ground  for  refusing  its  allowance; 
...  no  case  has  been  cited,  and  in  our  investigation  we  found  no  case  involving 
this  question,  where  a  reasonable  amount  has  not  been  considered  and  allowed  for 
loss  of  interest  during  construction  as  part  of  the  cost  of  construction. 

100.  The  Rate  of  Interest.  —  The  amount  allowable  for  interest  dur- 
ing construction  will,  of  course,  depend  upon  the  rate  at  which  interest  is 
computed,  and  upon  the  length  of  time  during  which  the  accrued  interest 
is  considered  a  capital  rather  than  an  operating  expenditure.    Rate  of  in- 
terest will  be  governed  by  the  prevalent  cost  of  money  in  the  locality  of 
the  property  under  consideration,  and  by  the  general  attitude  of  the  courts 
and  commissions  having  jurisdiction  over  the  territory  involved,  as  evi- 
denced by  their  decisions  in  similar  cases  in  the  past. 

There  is  one  point  in  this  connection  which  should  be  clearly  borne  in 
mind:  it  sometimes  happens  that  capital,  held  in  readiness  for  use  in  actual 
construction,  temporarily  earns  an  increment  during  the  period  of  inac- 
tion. As  an  illustration,  the  promoters  of  a  property  may  deem  it  advisa- 
ble to  borrow  in  advance  sufficient  funds  to  finance  several  years'  con- 
struction. Such  action  may  be  warranted  because  of  anticipated  future 
tightness  in  the  money  market,  expected  advance  in  rates,  or  other  perti- 
nent reasons. 

Until  the  money  was  actually  required  it  would  probably  be  deposited 
in  a  business  bank  or  with  a  trust  company,  and  there  earn  interest  at  a 
somewhat  less  rate  than  that  charged  by  the  original  lenders. 

In  cases  of  this  kind  only  the  net  rate  should  be  used  in  computing  in- 
terest during  construction.  If  the  money  costs  6  per  cent  and  earns  3  per 


COLLATERAL  CONSTRUCTION  COSTS  45 

cent,  the  difference,  3  per  cent,  should  be  used  in  determining  the  interest 
on  the  portion  of  the  total  capital  earning  a  temporary  partial  return. 

101.  Computation  of  Interest  during  Construction.  —  The  proper 
length  of  time  during  which  interest  may  be  considered  as  a  charge 
against  the  capital  account  should  be  readily  determinable  from  the  as- 
sumed schedule  of  progress  of  construction.  Interest  should  be  computed 
on  the  total  of  the  direct  construction  cost  plus  those  elements  of  collateral 
construction  cost  which  we  have  already  considered;  i.e.,  general  and 
legal  expense,  engineering  and  general  supervision,  taxes  and  insurance. 


46 


TELEPHONE  RATES  AND  VALUES 


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COLLATERAL  CONSTRUCTION  COSTS 


49 


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50         TELEPHONE  RATES  AND  VALUES 

Taxes  and  insurance  for  the  various  six  months'  periods  can,  of  course, 
be  readily  obtained  from  the  detailed  computations.  Engineering,  legal 
expenses,  etc.,  will  have  to  be  pro-rated  over  the  entire  construction  period, 
using  the  ratio  of  the  other  direct  and  collateral  costs  for  each  six  months' 
period  to  their  total  cost,  or  distributed  in  accordance  with  the  best  judg- 
ment of  the  appraisal  engineer. 

102.  Illustration  of  Method  of  computing  Interest  during  Con- 
struction. —  In  Figs.  6,  7  and  8  is  presented  an  illustration  of  the  method 
of  computing  interest  during  construction. 

Interest  during  construction  has  been  calculated  on  the  average  invest- 
ment for  each  six  months  during  the  construction  period,  at  the  rate  of  6 
per  cent  per  annum,  compounded  semi-annually.  Interest  has  been 
charged  as  a  construction  expense  only  during  the  non-operative  period  of 
each  portion  of  the  property.  As  soon  as  the  various  portions  of  the  prop- 
erty were  placed  in  operation,  interest  ceased  as  an  item  of  construction 
cost. 

A  schedule  of  the  amounts  spent  on  each  of  the  various  items  of  construc- 
tion during  each  of  the  ten  semi-annual  periods  of  the  five-year  construc- 
tion period  is  contained  in  Fig.  6.  This  schedule  is  also  continued  through 
the  six  semi-annual  periods  of  the  sixth,  seventh  and  eighth  years,  so  as 
to  show  those  plant  expenditures  which  are  necessarily  deferred  until  the 
business  is  actually  secured.  The  plant  costs  during  this  latter  three-year 
period  have  not,  however,  been  included  in  the  calculations  of  interest 
during  construction,  because  the  items  involved  are  conceived  to  have 
been  put  into  service  as  soon  as  constructed. 

Fig.  7  shows  the  value  of  the  plant  put  into  operation  during  the  various 
periods. 

The  calculation  of  interest  during  construction,  based  on  the  first  five 
years  of  the  construction  schedule,  of  Fig.  6,  is  shown  in  Fig.  8. 

103.  Construction  in  Progress.  —  As  suggested  in  section  61,  it 
often  happens  that  a  portion  of  a  plant  is  in  progress  of  construction  at 
the  date  of  appraisal.    In  cases  of  this  kind  the  task  of  ascertaining  the 
exact  status  of  such  work  at  the  appraisal  date  devolves  upon  the  appraisal 
engineer.    Plant  in  process  of  construction  should  not  be  included  in  the 
appraisal  of  the  inventoriable  property,  but  should  be  separately  appraised 
and  included  with  the  collateral  construction  costs  under  the  caption  "  Con- 
struction in  Progress." 

When  the  date  of  appraisal  is  practically  coincident  with  the  date  of 
inventory,  the  task  is  not  a  difficult  one.  By  reviewing  the  daily  comple- 
tion reports  for  estimates  and  job  orders  under  way  at  the  date  of  ap- 
praisal, and  subsequently  checking  the  status  of  the  work  by  a  personal 
field  inspection,  it  is  a  comparatively  simple  matter  to  determine  the 
reproduction  cost  of  plant  in  process  of  construction  at  the  appraisal 
date. 


COLLATERAL  CONSTRUCTION  COSTS  51 

104.  Reproduction  Cost  of  Construction  in  Progress.  —  This  re- 
production cost  may  be  ascertained  either  by  determining  the  cost  of  plant 
in  process  of  construction  as  it  will  be  when  completed,  and  subsequently 
reducing  this  cost  to  correspond  to  the  status  of  the  work  at  the  appraisal 
date,  or  by  estimating  in  detail  the  exact  expenditures  actually  made  to 
date.    In  either  case  the  result  should  be  the  same. 

Where  a  large  amount  of  plant  is  under  construction  at  the  appraisal 
date,  it  may  be  well  to  use  both  methods  in  determining  the  proper  allow- 
ance for  construction  in  progress. 

It  occasionally  happens  that  the  time  at  which  the  reproduction  cost  of 
the  property  is  sought  antedates  the  inventory  date  by  several  years.  In 
a  case  of  this  kind  construction  in  progress  must,  of  course,  be  determined 
entirely  by  the  historical  method,  —  by  reviewing  plant  and  accounting 
records  and  ascertaining  as  accurately  as  possible  what  work  was  under 
way  at  the  time  of  appraisal,  and  the  exact  status  of  the  various  estimates 
and  work  orders  as  of  the  appraisal  date. 

Under  certain  conditions  it  may  be  desirable  to  gauge  the  cost  of  con- 
struction in  progress  by  the  portion  of  the  total  cost  that  has  been  actually 
added  to  the  company's  capital  account  as  of  the  appraisal  date.  As  an 
illustration,  a  plant  which  will  eventually  cost  $100,000  may  be  in  process 
of  construction,  and  the  actual  cash  expenditure  at  the  date  of  appraisal 
may  amount  to  only  $50,000. 

The  prevalent  mode  of  recording  completed  work  may  cause  consider- 
able delay  in  transferring  costs  to  the  capital  account,  so  that  only  $10,000 
may  have  found  its  way  into  the  books  at  the  appraisal  date.  In  this  case 
$10,000  would  represent  the  appraised  cost  of  construction  in  progress. 

105.  Working  Capital.  —  An  operating  utility  corporation  —  or  for 
that  matter,  any  other  business  concern  —  requires  a  certain  amount  of 
ready  cash,  or  working  capital,  to  transact  its  everyday  business.    The 
company  must  be  in  a  position  to  take  advantage  of  discounts  offered  for 
prompt  payment  of  bills,  and  to  advance  to  district  managers  and  com- 
mercial agents,  periodically,  sufficient  cash  to  facilitate  the  proper  han- 
dling of  the  business  of  their  respective  departments. 

Courts  and  commissions  are  in  general  agreed  as  to  the  propriety  of  in- 
cluding an  allowance  for  working  capital  in  an  appraisal  for  rate-base  pur- 
poses. The  amount  required  will,  of  course,  depend  on  the  size  of  the 
utility  and  the  nature  of  its  business. 

The  determination  of  a  proper  allowance  for  working  capital  may  either 
be  made  on  a  percentage  basis  —  a  percentage  of  the  direct  construction 
costs  —  or,  perhaps  somewhat  more  accurately,  by  ascertaining  the  capital 
required  to  operate  the  company  for  the  several  years  preceding  the  ap- 
praisal, and  using  this  as  a  gauge  of  the  amount  of  the  working  capital 
which  may  properly  be  included  in  the  appraisal. 

106.  Computation  of  Working  Capital.  —  An  illustration  of  the 


52 


TELEPHONE  RATES  AND  VALUES 


method  of  computing  working  capital,  taken  from  an  appraisal  of  a  tele- 
phone property,  is  presented  in  Fig.  9.    Working  capital,  in  this  appraisal, 


DATE. 

Average 
Number  of 
Stations. 

Average 
Working  Cap- 
ital. 

Average  per 
Station. 

1912. 

First  6  months,      .                  
Second  6  months,          

47,894 
52,401 

$151,011  04 
202,756  11 

$3  15 

3  87 

1913. 

First  6  months  
Second  6  months,          

61,462 

228,136  39 

3  71 

1914. 
First  6  months  
Average  2H  years,         

65,115 
56,818 

194,088  47 
187,342  39 

2  98 
3  30 

Number  of  stations  in  service  June  30,  1914  67,125 
67,125  stations  at  $3.30,       $221,513 
Total  working  capital  .     $221,513 

FIG.  9.  —  Computation  of  working  capital. 


has  been  taken  as  those  funds  necessary  to  provide  for  a  reasonable  cash 
balance  to  permit  the  proper  conduct  of  the  business;  to  provide  em- 
ployees' working  funds,  and  to  cover  amounts  due  from  subscribers  and 
agents. 

It  is  based  on  the  experience  of  the  company  for  the  two  and  one-half 
years  prior  to  the  date  of  the  appraisal,  and  has  been  calculated  on  the 
basis  of  the  average  per  subscriber's  station  during  this  period,  applied  to 
the  number  of  subscribers'  stations  in  service  at  the  date  of  the  appraisal. 

107.  Relation  of  Collateral  Costs  to  Other  Costs.  —  In  summing 
up  the  collateral  construction  costs  it  may  be  said  that  each  of  the  compo- 
nent items,  with  the  exception  of  construction  in  progress  and  working 
capital,  represents  elements  of  cost  which  are  just  as  real  and  just  as 
essential  to  the  construction  of  a  utility  property  as  those  embodied  in 
the  unit  costs. 

It  is  unfortunate  that  the  collateral  costs  cannot  be  included  in  the  unit 
costs.  Their  segregation  sometimes  creates  the  erroneous  impression  that 
they  are  something  entirely  apart  from  the  direct  construction  cost,  — 
something  that  has  been  added  for  good  measure. 

Several  cases  might  be  cited  where  counsel  representing  municipalities 
or  civic  organizations  in  rate  cases,  either  through  ignorance  of  the  subject 
in  hand  or  through  a  wilful  attempt  at  misrepresentation,  have  tried  to 
prove  that  the  collateral  costs  —  or  "Overhead,"  as  they  are  sometimes 
called  —  are  not  a  real  element  of  cost,  but  an  imaginary  value  added  for 
the  sole  purpose  of  padding  the  total  value  of  the  plant.  Fortunately, 
most  of  the  State  commissions,  and  many  of  the  courts,  have  had  a  wide  and 


COLLATERAL  CONSTRUCTION  COSTS  53 

varied  experience  in  appraisement  problems,  and  are  disposed  to  be  abso- 
lutely fair  in  their  allowances  for  collateral  construction  costs. 

108.  Percentage  Values  of  Elements  of  Collateral  Costs.  —  If 
computed  on  the  basis  of  a  percentage  of  the  direct  construction  costs,  the 
usual  range  of  values  assigned  to  the  various  elements  of  collateral  costs 
is  as  follows:  — 

Per  Cent 

General  and  legal  expense  during  construction,      ...          .          .  2  to    6 

Engineering  and  general  supervision  during  construction          .          .  5  to    9 

Taxes  and  insurance  during  construction,      .          .          .          .          .  3  to    5 

Interest  during  construction,       .          .          .          .          .          .          .  5  to    8 


Total  collateral,  or  overhead,  expense,  .          .          .          .          .          .     15  to  28 

It  is  customary  to  determine  the  present  value  of  the  collateral  construc- 
tion costs  by  depreciating  them  at  the  same  rate  as  the  direct  construction 
costs.  In  other  words,  the  ratio  of  the  present  value  of  the  direct  construc- 
tion costs  to  their  reproduction  cost,  when  applied  to  the  various  elements 
of  collateral  cost,  will  give  their  respective  present  values.  Working  capi- 
tal and  plant  in  process  of  construction  should  not  be  depreciated,  for 
obvious  reasons. 


CHAPTER  VI 
THE  NON-PHYSICAL  ASSETS 

109.  Elements  of  Non-physical  Assets.  —  In  arriving  at  the  total 
reproduction  cost  there  still  remains,  after  all  of  the  component  elements 
of  the  cost  of  the  physical  property  have  been  considered,  the  "non-physi- 
cal assets,"  sometimes  referred  to  collectively  as  the  "  intangible  value." 

Courts  and  commissions  are  quite  generally  agreed  as  to  the  propriety  of 
including,  in  a  rate-base  appraisal,  all  of  the  elements  of  direct  and  col- 
lateral cost.  They  may,  however,  and  frequently  do  qualify  the  monetary 
values  assigned  to  the  various  items  by  appraisal  engineers.  But  when  it 
comes  to  the  non-physical  assets  the  best  that  can  be  said  is  that  many 
of  the  commissions  have  given  this  subject  much  time  and  thought.  As  a 
result  the  utilities  are  now  receiving  more  favorable  decisions  than  would 
have  been  possible  five  or  six  years  ago. 

With  the  possible  exception  of  good  will  and  contract  value,  there  is 
nothing  unreal  or  ethereal  about  the  non-physical  assets.  They  are  not,  as 
so  many  people  seem  to  think,  added  to  the  appraisal  merely  for  the  pur- 
pose of  obtaining  a  maximum  plant  valuation  to  the  ultimate  end  of 
squeezing  the  highest  possible  rates  from  the  service  subscribers. 

Such  items  as  cost  of  establishing  business,  franchise  cost  and  cost  of 
financing  are  real  elements  of  the  cost  of  building  up  any  going  utility 
business.  They  represent  appreciable  expenditures.  In  the  writer's 
opinion  the  difficulty  in  the  past  of  obtaining  favorable  rulings  as  to  the 
non-physical  assets  has  been  due,  not  so  much  to  doubt  in  the  minds  of 
commissioners  regarding  the  existence  of  an  intangible  value,  as  to  the 
difficulty  in  allocating  the  expenditures  involved,  and  to  the  lack  of  clear- 
cut,  readily  analyzed  methods  of  estimating  such  expenditures. 

The  non-physical  assets,  it  will  be  remembered,  are:  good  will,  franchise 
value,  cost  of  establishing  business,  cost  of  financing,  and  value  of  con- 
tracts and  agreements. 

110.  Good  Will.  —  It  is  commonly  conceded  that  good  will  can  have 
no  place  in  the  valuation,  for  rate  purposes,  of  a  monopolistic  utility. 
Lord  Elden,  in  discussing  good  will,  says :  — 

Good  will  is  nothing  more  than  the  probability  that  the  old  customers  will  resort 
to  the  old  place,  —  that  it  involves  an  element  of  personal  choice,  and  is  inappro- 
priate where  there  can  be  no  choice,  and  therefore  should  be  given  no  value. 

In  the  telephone  field,  however,  we  are  constantly  confronted  with 
cases  where,  apparently,  at  least,  there  is  an  element  of  choice.  Two 


THE   NON-PHYSICAL  ASSETS  55 

telephone  companies  operating  in  the  same  town  may  have  a  large  number 
of  subscribers  in  common.  But,  even  in  this  case,  it  is  obviously  out  of 
the  question  to  capitalize  good  will  in  the  appraisal  of  the  property  of 
either  company  for  rate  adjustment  purposes. 

Circumstances  might  arise,  however,  where  one  of  the  companies  would 
be  willing  to  pay  considerably  in  excess  of  the  actual  value  of  its  competi- 
tor's property  to  eliminate  its  rival  from  the  field.  In  such  a  case  it  is 
probable  that  the  purchase  price  would  include  an  allowance  for  good  will, 
but  undoubtedly  such  an  allowance  would  take  the  form  of  a  maximum 
valuation  of  the  various  elements  of  direct  and  collateral  construction 
cost,  rather  than  as  a  specific  allowance  set  aside  in  the  appraisal  for  good 
will. 

Changes  of  ownership  of  utility  properties  are  subject  to  approval  of 
the  State  commissions,  and  it  is  highly  improbable  that  any  commission 
would  ratify  a  sale  where  the  element  of  good  will  was  distinctly  set  forth 
in  the  purchase  price. 

A  liberal-minded  commission  might,  however,  recognize  that  the 
property  had  a  competitive  value  over  and  above  the  actual  value  of 
the  plant,  and  therefore  allow  the  use  of  somewhat  higher  appraisal 
units  than  would  otherwise  be  justified.  But  cases  of  this  kind  are  exceed- 
ingly rare.  For  all  practical  purposes,  good  will  is  not  to  be  considered  a 
factor  in  public  utility  appraisal  work. 

111.  Value  of  Contracts  or  Agreements.  —  It  frequently  happens 
that  operating  utility  corporations  have  exceedingly  profitable  contracts 
or  agreements  with  other  utilities.  A  telephone  company,  for  instance, 
may  have  an  agreement  with  the  local  electric  light  company  providing 
for  the  free  use  of  the  latter's  poles  throughout  an  entire  section  of  a  town. 
Usually  an  arrangement  of  this  kind  is  reciprocal,  the  electric  light  com- 
pany, in  return  for  its  concession,  being  granted  the  privilege  of  the  free 
use  of  an  equal  number  of  telephone  poles. 

Undoubtedly  agreements  of  this  nature  are  exceedingly  profitable  to 
the  beneficiaries,  obviating,  as  they  do,  appreciable  outlays  for  pole 
plant. 

Attempts  to  assign  a  value  to  contracts  and  agreements  in  rate-base 
appraisals  have  met  with  the  almost  universal  disapproval  of  courts  and 
commissions,  except  in  cases  where  the  utility  corporation  can  show  that 
the  securing  or  carrying  out  of  such  contracts  involved  actual  cash  ex- 
penditures. 

One  notable  exception  to  this  rule  is  found  in  the  case  of  the  Union 
Electric  Light  and  Power  Company  of  St.  Louis.  This  company  was 
permitted  by  the  Public  Service  Commission  of  St.  Louis  to  capitalize 
at  8  per  cent  the  rentals  saved  through  an  agreement  with  the  local  tele- 
phone company  involving  the  free  use  of  the  latter's  poles.  The  total 
contract  value  assigned  was  $80,000. 


56         TELEPHONE  RATES  AND  VALUES 

Where  actual  costs  are  involved  in  the  securing  or  carrying  out  of  an 
agreement,  as  a  rule,  there  is  a  little  difficulty  in  convincing  public  utility 
commissions  as  to  the  propriety  of  including  such  costs  in  a  rate-base 
appraisal.  In  the  case  of  a  telephone  company  these  costs  usually  consist 
of  the  salaries,  car  fare  and  incidental  expenditures  of  the  special  agents 
employed  in  securing  the  agreement,  and  any  payments  the  telephone 
company  may  make  to  the  foreign  company  to  cover  the  expense  of  re- 
arranging the  latter 's  interests  to  provide  room  for  the  telephone  company 
on  the  poles  that  are  to  be  jointly  used. 

The  cost  of  rearranging  an  electric  light  company's  wires  and  cables  to 
facilitate  joint  pole  use  has  been  found  to  average  from  50  cents  to  $1  a 
pole.  The  latter  figure  has  been  used  in  several  recent  appraisals. 

112.  Relation  of  Franchise  to  Value  of  Utility  Property.  —  The 
valuation  of  franchises  has  long  been  a  bone  of  contention  between  utilities 
and  regulatory  bodies.    Looking  at  the  matter  solely  from  the  standpoint 
of  the  utility,  there  would  seem  ample  justification  for  contending  that 
franchises  have  an  appreciable  monetary  value. 

The  franchise  is  the  foundation  upon  which  the  whole  utility  structure 
is  built.  Take  away  the  franchise,  and  the  most  prosperous  of  properties 
becomes  a  mere  mass  of  second-hand  material  worth  only  what  the  junk 
dealer  can  be  induced  to  pay  for  it.  Indeed,  many  items  of  plant,  such 
as  underground  conduit,  involving  large  initial  expenditures  and  of  great 
value  to  the  company  throughout  its  life  as  an  operating  utility,  become 
absolutely  worthless  the  moment  the  franchise  is  revoked. 

It  would  seem,  then,  that  the  franchise  must  be  one  of  the  most  valuable 
assets  of  a  utility  corporation,  inasmuch  as  the  very  life  of  the  company  is 
dependent  upon  its  preservations.  On  the  other  hand,  from  the  standpoint 
of  the  commissions,  and  from  that  of  the  public  they  represent,  there  is 
an  equally  good  argument  for  debarring  from  a  rate-base  appraisal  all 
franchise  values  except  those  representing  actual  costs  incurred  in  securing 
the  franchises. 

113.  Valuation  of  Franchise  in  Rate-base  Appraisal.  —  Franchises 
are  in  the  nature  of  a  gift  from  the  people.    It  is  obviously  most  unfair, 
therefore,  to  ask  the  people,  or  those  of  them  who  are  utility  patrons,  to 
pay  rates  based  upon  a  capitalization  of  their  own  gift. 

This  represents  the  general  attitude  of  courts  and  commissions  on  the 
subject  of  franchise  valuation;  i.e.,  the  value  assigned  to  franchises  in  a 
rate-base  appraisal  shall  be  limited  to  the  actual  expenditures  incurred  in 
securing  such  franchises. 

The  question  of  franchise  value  affords  an  excellent  illustration  of  the 
difference  which  may  exist  between  value,  or  fair  value,  and  value  for  rate- 
making  purposes.  In  acquiescing  to  a  commission's  ruling  that  only 
actual  costs  shall  be  included  in  a  rate-base  appraisal  as  the  value  of  its 
franchise,  the  company  may  contend  —  and  very  properly  so  —  that  the 


THE  NON-PHYSICAL  ASSETS  57 

actual  fair  value  of  the  franchise  is  far  greater  than  any  possible  cost  in- 
curred in  securing  it,  and  the  value  thus  assigned  is  a  rate-base,  rather 
than  a  fair,  value. 

The  equity  of  this  method  of  evaluating  franchises  cannot  be  ques- 
tioned. It  would  seem,  however,  that  in  return  for  waiving  any  claim  for 
greater  values,  utility  corporations  should  receive  the  maximum  of  pro- 
tection at  the  hands  of  municipal  and  State  regulatory  bodies  in  the 
matter  of  franchise  renewals,  so  long  as  the  companies  conduct  themselves 
in  such  a  manner  as  to  warrant  public  confidence. 

The  legal  cost  involved  in  securing  franchises  has  already  been  discussed. 
There  remains,  therefore,  only  the  consideration  of  such  other  expenses 
as  may  legitimately  be  involved  in  securing  the  franchise.  These  are  usu- 
ally of  a  minor  nature,  excepting  in  the  municipalities  where  it  is  custom- 
ary to  require  prospective  utility  corporations  to  bid  for  their  franchise 
privileges. 

114.  Cost  of  Establishing  Business  or  Going  Value.  —  Going  value 
has  been  variously  defined  as  "the  cost  of  establishing  the  business," 
"the  cost  of  acquiring  an  income,"  and  "the  capitalization  of  early  losses 
incurred  in  connection  with  the  development  of  the  business  to  where  it  is 
capable  of  producing  a  fair  return  on  the  investment." 

This  phase  of  the  subject  of  public  utility  appraisals  is  one  that  has 
always  proven  a  thorn  in  the  side  of  the  appraisal  engineer,  and  one  that 
is  usually  rather  difficult  for  the  beginner  in  appraisal  work  to  grasp. 

There  are  several  prevalent  methods  of  deriving  going  value,  and  many 
explanations  of  the  underlying  theories  have  been  advanced  by  eminent 
authorities.  The  following  extract  from  the  testimony  of  Kempster  B. 
Miller,  in  a  recent  rate  case,  presents  the  clearest  explanation  of  going 
value  which,  in  the  writer's  opinion,  has  yet  been  advanced:  — 

"It  is  self-evident  that  a  physical  plant  with  a  well-established  business 
is  worth  more  than  the  same  physical  plant  without  any  business.  This 
element  of  value,  over  and  above  the  bare  value  of  the  physical  plant, 
I  have  included  under  the  heading  of  cost  of  establishing  business.  It  is 
sometimes  called  going  value.  That  such  a  value  exists  is  indisputable, 
and,  besides  being  a  self-evident  fact,  has  been  upheld  by  courts  of  highest 
resort. 

115.  Analogy  to  illustrate  Theory  of  Cost  to  reproduce  Physical 
Property.—  "In  appraising  the  physical  property,  we  proceeded  upon 
the  basis  that  the  best  measure  of  its  value  was  what  it  would  cost  to 
reproduce  it.     I  have  followed  this  same  procedure  in  appraising  the 
value  of  the  business  attached  to  the  physical  plant  by  calculating  as 
closely  as  possible  what  it  would  cost  to  reproduce  the  business  that  existed 
on  the  date  of  appraisal. 

"I  may,  perhaps,  make  the  theory  upon  which  I  proceeded  clearer  by 
a  simple  analogy.  A  man  who  desired  to  invest  his  money  in  a  large 


58         TELEPHONE  RATES  AND  VALUES 

office  building  might  enter  into  an  agreement  with  a  contractor  to  construct 
the  building  and  turn  it  over  to  him  at  a  given  date  for  a  fixed  sum. 

"In  this  case  the  amount  so  paid  would  constitute  the  cost  of  the 
physical  property.  This  amount,  however,  would  be  only  a  part  of  what 
the  owner  would  have  to  pay  in  order  to  produce  a  building  filled  with 
tenants  and  established  on  a  going  basis.  In  order  to  fill  his  building  with 
tenants  and  place  it  on  an  income-producing  basis,  it  will  be  necessary 
for  him  to  organize  his  operating  force  and  sell  his  space,  meanwhile 
operating  the  building,  keeping  it  warm,  running  the  elevators,  and 
supplying  the  attendant  janitor  and  other  operating  services. 

"Instead  of  contracting  for  the  bare  building,  the  owner  might  include 
as  a  part  of  his  agreement  with  the  contractor  the  turning  over  of  the 
building  full  of  tenants  and  completely  organized  as  a  going  concern. 
In  this  case  it  is  perfectly  obvious  that  the  contractor  could  not  deliver 
the  building  at  as  early  a  date  nor  for  the  same  amount  of  money  as 
when  his  task  was  confined  to  the  production  of  the  bare  building  alone. 

"As  the  building  approached  completion  he  would  be  required  to  have 
agents  at  work  securing  leases  from  prospective  tenants.  He  would  be 
required  to  secure  an  adequate  operating  force  for  the  building,  consisting 
of  a  competent  building  superintendent  and  his  office  force,  a  building 
engineer  and  his  subordinates,  including  elevator  men,  a  suitable  janitors' 
force,  and,  in  fact,  a  complete  organization  necessary  to  keep  the  building 
warm  and  clean,  and  to  carry  out  all  of  the  other  functions  required.  All 
this  would  have  to  be  done  before  the  tenants  actually  began  to  occupy 
the  building. 

"After  the  actual  opening  of  the  building,  and  until  such  time  as  the 
number  of  tenants  required  by  the  contract  were  secured,  the  contractor 
would  be  forced  to  pay  all  operating  expenses,  which  at  the  beginning 
would  be  largely  in  excess  of  the  rents  received.  As  tenants  were  secured, 
the  revenue  would  begin  to  grow,  but  it  is  probable  that  the  contractor 
would  be  forced  to  give  a  certain  amount  of  rent  free  during  the  early 
stages  of  the  occupancy  of  the  building.  Such  revenues  as  were  received 
would,  of  course,  flow  to  the  contractor  as  an  offset  against  the  expenses. 
It  is  inevitable,  however,  that  the  sum  total  of  the  financial  results  during 
the  business  development  period  would  be  a  loss,  and,  together  with  the 
interest  thereon,  would  become  a  part  of  the  cost  to-  the  contractor. 

"This  total  cost  to  the  contractor,  plus  the  contractor's  profit,  would 
be  added  to  the  investment  of  the  owner  at  the  time  he  took  over  the 
building.  In  this  case  the  difference  between  this  larger  cost  of  the  build- 
ing full  of  tenants,  and  of  the  cost  of  the  physical  property  alone,  would 
constitute  the  cost  of  establishing  business,  and  would,  in  my  judgment, 
be  a  good  measure  of  the  going  value. 

116.  Division  of  Cost  of  Establishing  Business.  —  "In  my  ap- 
praisal of  the  telephone  property  under  consideration,  I  have  endeavored 


THE  NON-PHYSICAL  ASSETS  59 

to  estimate  as  accurately  as  possible  what  it  would  cost  the  company  to 
reproduce  the  business  and  organization  that  were  attached  to  the  plant 
on  the  appraisal  date  in  much  the  same  way  as  in  the  case  of  the  contractor 
just  outlined,  except  that  the  company  would  act  as  its  own  contractor, 
without  profit.  It  is  believed  that  money  would  cost  the  company,  under 
these  circumstances,  at  least  8  per  cent,  and  therefore  that  rate  of  interest 
has  been  included  in  the  cost  of  establishing  business. 

"The  cost  of  establishing  business,  as  derived  in  the  present  appraisal, 
has  been  divided  into  three  items :  — 

"(a)  Organization  and  development. 

"(b)  Selling  service. 

"(c)  Net  interest  and  operating  expenditures  during  development. 

117.  Organization  and  Development.  —  "It  is  self-evident  that 
an  organization,  from  executives  down  to  operators  and  laborers,  could 
not  be  gathered  together  in  the  assumed  reproduction  of  the  plant  and 
business  without  an  expenditure  of  money. 

"The  expense  incurred  in  training  and  schooling  operators  before 
they  can  become  proficient  enough  to  do  useful  work  at  the  switchboards 
is  one  of  many  examples  that  might  be  cited,  and  no  one  at  all  familiar 
with  the  telephone  business  can  deny  that  a  skilled  force  of  operators  is 
a  valuable  asset.  Again,  at  the  beginning  of  service  in  a  new  plant  it 
always  occurs  that  until  a  certain  number  of  subscribers  has  been  secured 
no  charge  can  be  made,  and  the  money  spent  during  this  period  is  a  part 
of  the  cost  of  building  up  the  organization. 

"We  have  placed  the  cost  of  organization  and  development  at  $33,000, 
this  being  less  than  2.5  per  cent  of  the  reproduction  cost  of  the  physical 
property.  There  is  ample  precedent  for  an  allowance  of  this  percentage, 
or  a  larger  one,  in  computing  this  item. 

118.  Selling  Service.  —  "It  has  been  generally  recognized  by  courts 
and  commissions  that  a  certain  amount  of  cost  is  involved  in  securing 
new  subscribers.    This  cost  resides  in  the  salaries  and  expenses  of  solicitors, 
in  advertising,  and  in  the  actual  clerical  expense  of  proper  enrollment. 

"This  cost  per  station  in  the  reproduction  of  a  plant  has  been  placed 
by  various  authorities  in  the  neighborhood  of  $4,  usually  that  amount  or 
more.  But  after  a  careful  study  of  the  present  situation  we  arrived  at 
the  conclusion  that  under  favorable  circumstances  we  might  be  able  to 
sell  service  at  a  cost  of  $3.50  per  station,  and  have  used  that  figure.  This, 
for  the  total  of  12,786  telephone  stations  at  the  date  of  this  appraisal, 
places  the  total  cost  of  selling  service  at  $44,751. 

119.  Net  Interest  and  Operating  Expenditures  during  Develop- 
ment. —  "It  has  been  assumed  that  the  total  time  required  for  repro- 
ducing the  plant  and  the  business  would  be  seven  and  one-half  years.    I 
chose  this  period  because  it  seemed  to  be  the  most  economical  one,  and 
would  bear  the  test  of  reason.    It  will  be  noted,  however,  from  the  schedule 


60         TELEPHONE  RATES  AND  VALUES 

of  expenditures,  that  the  bulk  of  the  plant  expenditures  was  incurred 
during  the  first  four  years,  and  that  the  remaining  three  and  one-half 
years  were  spent  in  a  gradual  rounding  out  of  the  property.  The  bulk 
of  the  plant  expenditures  during  this  later  period  was  principally  in  the 
nature  of  minor  extensions  necessary  to  connect  the  subscribers  as  they 
were  secured. 

"This  is  the  way  that  a  plant  would  be  built.  To  attempt  to  force 
matters  by  adopting  a  shorter  construction  and  business-building  period 
would  be  more  likely  to  result  in  a  greater  rather  than  a  smaller  total 
investment. 

"It  was  further  assumed  that  the  plant  actually  began  to  give  service 
and  to  charge  therefor  in  the  fourth  quarter  of  the  third  year,  or  two  years 
and  nine  months  after  the  beginning  of  construction.  By  this  means  it 
has  been  possible,  by  applying  common  experience  in  the  telephone 
business,  to  determine  with  reasonable  accuracy  what  the  investment 
would  be  in  the  plant  at  any  time  during  the  development  period;  and 
again,  by  applying  common  experience,  to  compute  what  the  operating 
and  other  expenditures  would  be,  what  the  revenue  would  be,  and,  finally, 
at  the  end  of  the  period,  what  the  net  cost  of  all  these  operations  would 
be  at  the  time  that  the  plant  was  a  fully  organized  and  going  concern. 

"In  a  tabulated  statement  we  have  shown  the  investment,  the  operat- 
ing and  other  expenditures,  and  also  the  revenue,  if  any,  during  each 
quarter.  This  gives  the  basis  for  determining  the  deficit  or  profit  for 
each  quarter,  thus  making  it  possible  to  compute  the  net  amount  of 
money  required  for  each  quarter,  the  cumulative  amount  up  to  each 
quarter,  and  the  interest  thereon  throughout  the  entire  period. 

"This  total  interest,  thus  computed,  amounts  to  $586,051,  but  inasmuch 
as  interest  during  construction,  amounting  to  $78,018,  has  already  been 
allocated  to  the  cost  of  the  physical  property,  this  amount  is  deducted 
from  the  amount  involved  in  the  cost  of  establishing  business.  Again, 
during  the  entire  period  the  total  revenue  of  $1,128,743  exceeded  the 
total  operating  expenditures  of  $743,694  by  $385,049.  This  operates 
as  a  credit  against  operating  expenditures,  and  therefore  as  a  second 
deduction  from  the  total  interest  account. 

"These  two  deductions  amount  to  $463,057,  which,  deducted  from  the 
total  interest  of  $586,051,  leaves  a  balance  of  $122,984  as  the  amount  of 
net  interest  and  operating  expenditures  during  development. 

120.  Summary  of  Theory  of  Cost  of  Establishing  Business.  - 
"To  summarize,  the  theory  upon  which  I  have  proceeded  in  estimating 
the  cost  of  establishing  business  was  to  assume,  as  is  the  case,  that  the 
town  presented  an  average  opportunity  for  a  telephone  enterprise;  that 
the  development  of  the  property  there  in  its  hypothetical  reproduction 
was  carried  out  with  ordinary  care;  and  that  a  period  of  three  years 
would  be  required  to  reproduce  the  bulk  of  the  property,  and  a  total  of 


THE   NON-PHYSICAL  ASSETS  61 

seven  and  one-half  years  would  be  required  to  reproduce  all  of  the  business 
and  make  the  gross  and  net  incomes  equal  to  what  tney  were  on  June  30, 
1915. 

"  Under  these  circumstances,  the  deficit  for  the  first  year  would  neces- 
sarily, with  reasonable  interest,  be  required  to  be  carried  over  to  the  next 
year.  The  deficit  at  the  end  of  that  year  would  necessarily  be  added  to 
the  previous  one,  and,  with  interest  thereon,  carried  to  the  next  year, 
and  so  on  from  year  to  year,  the  deficiency  decreasing  each  year  until 
finally  the  current  income  would  be  more  than  sufficient  to  balance  the 
current  liabilities,  and  at  the  end  of  the  period  would  be  as  they  were 
at  the  date  of  appraisal.  In  this  state  of  equilibrium  the  deficiency  account 
would  seem  to  be  a  fair  measure  of  the  value  of  the  mature  going  business. 

121.  Total  Cost  of  Establishing  Business.  —  "The  three  items 
in  the  total  cost  of  establishing  business  —  $33,000  for  organization 
and  development,  $44,751  for  selling  service,  and  $122,984  for  net  interest 
and  operating  expenditures  during  development  —  amount  to  $200,735. 
This  is  slightly  less  than  15  per  cent  of  the  total  reproduction  cost  of  the 
physical  property,  which,  measured  by  all  standards  of  comparison  that 
I  have  been  able  to  secure,  is  conservative. 

"Of  the  many  methods  that  have  been  proposed  for  calculating  going 
value,  or  cost  of  establishing  business,  I  have  applied  all  that  seem  in 
any  wise  reasonable  to  the  facts  in  this  case,  and  they  have  almost  uni- 
versally produced  a  larger  value  than  the  one  herein  presented.  For 
instance,  in  the  recent  case  before  the  Board  of  Public  Utilities  Com- 
missioners of  New  Jersey,  involving  the  telephone  rates  at  Camden, 
the  method  advanced  by  the  commission,  when  applied  to  the  present 
case,  results  in  a  figure  of  $211,342,  which  is  5  per  cent  higher  than  the 
figure  set  up  in  my  appraisal." 

122.  General  Attitude  of  Courts  and  Commissions  relative  to 
Going  Value.  —  The  following  opinion  of  the  California  Supreme  Court 
in  the  Contra  Costa  Water  Co.  v.  City  of  Oakland,  113  Pac.  668,  decided 
Jan.  19,  1911,  typifies  the  general  attitude  of  courts  and  commissions  on 
the  subject  of  going  value:  — 

Both  of  these  witnesses  also  included  in  their  totals  an  item  of  $500,000  as  the 
value  of  the  going  business  of  plaintiff.  Their  theory  in  regard  to  this  item  was, 
as  stated  by  learned  counsel  for  plaintiff,  that  the  property  and  business  of  the 
plaintiff  had  a  value  as  being  the  property  and  business  of  a  concern  which,  in 
the  legal  and  commercial  sense,  is  a  "going  concern,"  and  which  has  a  thoroughly 
established  business  over  and  above  and  in  addition  to  the  mere  cost  or  cost  of 
reproduction  of  its  property  and  plant,  and  what  the  value  of  said  property  would 
be  at  the  time  when  its  works  were  just  completed.  .  .  . 

It  may  be  conceded  that  the  fact  that  the  works  of  plaintiff  are  in  actual  use 
as  part  of  a  going  concern  gives  them  a  greater  value  to  the  stockholders  than 
they  would  otherwise  have.  It  supplies  the  capacity  to  earn  returns  which  would 
otherwise  be  wanting. 


62         TELEPHONE  RATES  AND  VALUES 

Purely  for  the  purposes  of  this  decision  we  may  assume  it  to  be  true,  as  was  said 
by  Judge  Farrington  in  Spring  Valley  Water  Co.  v.  City  and  County  of  San  Fran- 
cisco, supra,  that  the  value  of  the  going  business  and  franchise  depends  upon  their 
earning  power.  Where,  as  here,  that  earning  power  depends  on  the  rates  to  be 
fixed  annually  by  the  city  council  in  such  a  way  as  to  give  only  a  fair  return  on  the 
property  in  use,  and  the  franchise  is  neither  exclusive  nor  defined  by  any  special 
contract  with  the  city,  these  elements  would  appear  to  play  a  very  small  part,  if 
any,  in  the  matter  of  valuation.  However  this  may  be,  it  is  plain  that  none  of  the 
witnesses  furnished  any  evidence  upon  which  any  value  could  be  added  on  account 
of  either  of  these  items. 

The  theory  of  both  Mr.  Adams  and  Mr.  Schuyler  was,  as  stated  by  plaintiff's 
counsel,  that  this  value  was  measured  by  the  losses  sustained  and  the  deficiencies 
of  income  accruing  to  it,  in  the  early  period  of  its  operations,  and  up  to  the  time 
that  it  had  been  brought  to  a  paying  basis.  Mr.  Kiersted,  the  only  other  witness 
on  this  subject,  measured  the  value  of  this  element  of  "going  concern"  in  practically 
the  same  way.  Mr.  Adams  in  one  of  his  estimates  concluded,  as  a  matter  of  indi- 
vidual judgment,  that  in  an  enterprise  having  the  characteristics  and  magnitude 
of  the  old  Contra  Costa  Water  Company,  there  must  have  been  in  the  inception 
of  the  concern  losses  or  deficiencies  in  income  to  the  extent  of  $500,000. 

In  his  other  estimate  he  made  a  computation  of  the  early  losses,  treating  them 
as  the  difference  between  the  return  of  5.63  per  cent,  which  the  company  had  actually 
received,  as  computed  by  him  from  its  annual  statements,  and  the  return  of  7 
per  cent,  which  he  believed  it  should  have  received.  Mr.  Schuyler  and  Mr.  Kiersted 
followed  the  same  general  lines.  This  was  all  the  evidence  supporting  this  item. 
We  think  it  very  clear  that  it  had  no  relation  to  the  question  of  present  value,  and 
afforded  no  basis  for  any  valuation  by  the  trial  court  of  either  of  these  elements,  — 
franchise  or  going  concern.  .  .  . 

It  is  unnecessary  to  say  that  the  burden  was  on  the  plaintiff  to  furnish  data 
showing  that  these  elements  had  a  distinct,  independent  productive  value,  before 
any  such  value  could  be  included.  See,  in  regard  to  value  of  franchise,  Willcox  v. 
Consolidated  Gas  Co.,  supra. 

In  what  we  have  said  we  do  not  desire  to  be  understood  as  deciding  that  in 
the  matter  of  fixing  water  rates,  anything  at  all  should  be  added  to  the  value  on 
account  of  the  element  of  "going  concern." 


It  will  be  noted  that  the  court,  while  admitting  the  existence  of  going 
concern  value,  holds  that  the  plaintiff  has  not  been  able  to  furnish  suffi- 
ciently conclusive  evidence  to  warrant  the  inclusion  of  this  item  in  a  rate- 
base  appraisal. 

This  opinion  clearly  shows  the  need  for  clear-cut,  readily  assimilated 
methods  of  determining  going  value.  The  more  complex  methods,  what- 
ever their  value  from  an  engineering  and  accounting  standpoint,  only  tend 
to  befog  the  issue,  and  have  very  little  chance  of  securing  the  favorable 
consideration  of  either  courts  or  public  utility  commissions. 

123.  Cost  of  Financing.  —  In  financing  utility  properties  it  is  usually 
necessary  to  offer  some  inducement  to  obtain  capital  over  and  above  the 
interest  paid  on  the  borrowed  moneys.  The  reason  for  this  will  be  obvious. 
People  are  not  prone  to  hazard  their  money  in  a  new  undertaking  unless 
the  opportunity  for  gain  is 'more  alluring  than  in  other  firmly  established 


THE  NON-PHYSICAL  ASSETS  63 

and  equally  remunerative  —  as  far  as  the  fixed  rate  of  interest  is  concerned 
—  fields. 

This  cost  financing,  or  cost  of  enticing  capital,  as  it  might  well  be 
called,  may  be  divided  into  two  general  classifications,  —  cost  of  securing 
preliminary  capital  and  cost  of  securing  permanent  capital. 

124.  Cost  of  Securing  Preliminary  Capital.  —  At  the  beginning 
of  the  construction  period  there  is,  of  course,  no  tangible  property  to 
mortgage.    The  backers  of  an  enterprise  must  be  men  of  sufficient  credit 
to  borrow  on  short-term  notes  enough  money  to  start  the  enterprise. 

To  obtain  such  capital  it  is  necessary  to  pay  high  rates  of  interest.  In 
one  of  the  western  States  it  is  customary  to  pay  6  per  cent  for  capital 
secured  on  first  mortgage  bonds  and  nearly  7  per  cent  for  mone3rs  borrowed 
on  short-term  notes.  The  difference  between  these  two  rates  —  1  per 
cent  —  is  an  element  of  the  cost  of  financing. 

125.  Cost  of  Securing  Permanent  Capital.— Toward  the  end  of 
the  construction  period,  when  the  utility  corporation  has  been  brought 
into  being  and  endowed  with  a  tangible  and  marketable  property,  these 
short-term  notes  are  retired  by  the  sale  of  permanent  securities,  but  even 
at  this  time  it  is  necessary  to  offer  an  inducement  to  secure  capital. 

In  the  first  place,  to  insure  the  speedy  disposal  of  permanent  securities, 
it  is  necessary  to  call  upon  a  reputable  firm  of  financial  agents,  —  a 
banking  or  brokerage  house.  This  involves  expense  for  investigations 
on  the  part  of  the  fiscal  agents,  for  no  firm  will  assume  the  responsibility 
of  financing  a  property  until  it  is  thoroughly  satisfied  as  to  the  soundness 
of  the  enterprise. 

Next  comes  the  expense  of  marketing  the  securities,  and  the  profit  to 
the  financial  agents,  and  lastly  some  inducement  in  the  way  of  an  under 
par  price  must  be  offered  to  attract  the  investing  public.  As  a  result, 
securities  having  a  redeemable  or  par  value  of  $100  per  share  often  do 
not  net  the  utility  more  than  $90. 

126.  Attitude  of  Courts  and  Commission  on  Financing  Cost.  - 
It  will  be  seen  that  the  cost  of  financing  is  a  very  real  element  in  the  total 
cost  of  producing  a  utility  property,  and  one  that  is  certainly  entitled 
to  consideration  in  ascertaining  the  reproduction  cost. 

The  attitude  of  courts  and  commissions  on  the  subject  of  financing  cost 
is  evidenced  by  the  following  quotation :  — 

The  plant  in  question  here,  for  instance,  was  built  by  borrowed  money  or  by  the 
sale  of  securities  which  not  only  bear  interest  at  6  per  cent  from  the  time  they 
were  issued,  but  which  also  had  to  be  discounted  at  no  less  than  8  per  cent  besides. 
In  other  words,  they  brought  8  per  cent  less  than  par  value  in  the  money  markets. 

If  the  plant  was  needed  and  these  were  the  best  terms  upon  which  the  capital 
for  its  construction  could  be  obtained,  it  is  certainly  difficult  to  see  what  other  dis- 
position can  be  made  of  these  charges  than  to  include  them  in  the  cost  of  the  plant, 
at  least  until  they  can  be  written  off  from  earnings,  if  this  course  should  be  found 


64         TELEPHONE  RATES  AND  VALUES 

to  be  advisable,  for  it  is  clear  that  no  private  party  would  enter  a  business  of  this 
kind  if  they  had  to  foot  such  losses  out  of  their  own  pockets. 

Such  interests  and  discounts,  therefore,  often  constitute  a  part  of  the  price  upon 
which  the  consumers  must  pay  interest  if  they  desire  the  conveniences  that  are 
offered  by  the  utilities,  because  these  are  usually  the  best  terms  upon  which  such 
utilities  can  be  had.  These  facts  indicate  quite  clearly  that  the  amount  of  interest 
or  discount  that  it  may  become  necessary  to  include  in  the  construction  account  is 
a  question  that  depends  upon  the  facts  in  each  particular  case,  and  that  it  is  a 
matter  that  cannot  always  be  determined  in  advance. 

127.  Cost  of  Financing  during  the  Construction  Period. —  In 

the  following  illustration  of  the  method  of  computing  the  cost  of  financing, 
taken  from  a  recent  appraisal,  the  cost  of  financing  during  the  construc- 
tion period  is  first  considered. 

Under  cost  of  financing  has  been  included  the  extra  cost  of  raising 
money  during  the  construction  period  over  and  above  the  ordinary  invest- 
ment interest,  and  also  the  cost  of  the  permanent  financing  of  the  enter- 
prise after  it  has  become  an  operating  concern. 

The  plan  of  financing  adopted  for  the  purpose  of  this  appraisal  has 
been  that  the  moneys  required  during  the  construction  period  would  be 
raised  by  short-term  notes,  which  would  be  retired,  as  the  various  portions 
of  the  plant  were  put  into  service,  by  the  selling  of  permanent  securities 
in  the  form  of  stock  and  bonds. 

Interest  during  construction  has  been  figured  at  the  rate  of  6  per  cent, 
and  has  been  included  under  that  caption.  It  seems  certain,  however, 
that  the  rate  of  6  per  cent  is  not  sufficient  to  provide  funds  during  the 
construction  period  for  the  establishment  of  a  new  enterprise.  A  study 
of  the  notes  authorized  by  the  California  Railroad  Commission  on  light, 
power,  gas,  water  and  telephone  companies  during  1913  and  1914  shows 
that  the  average  rate  of  interest  on  notes  was  6.992  per  cent,  or  practically 
7  per  cent. 

Since  stock  or  bonds  could  not  be  sold  during  the  construction  period, 
except  at  an  enormous  sacrifice,  it  has  been  .assumed  that  the  parties 
building  the  plant  were  men  with  sufficient  credit  to  borrow,  by  short- 
term  notes,  on  a  new  enterprise  at  practically  the  same  rate  as  the  average 
rate  paid  in  this  State  on  more  or  less  seasoned  enterprises. 

This  computation  is  shown  in  Fig.  10. 


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66         TELEPHONE  RATES  AND  VALUES 

128.  The   Computation   of  the   Permanent  Financing.  —  The 

plan  of  permanent  financing  contemplates  the  issuance  of  permanent 
securities  as  an  evidence  of  the  total  investment  in  the  property.  Whether 
these  securities  would  be  in  stock,  in  bonds,  or  partly  in  each,  is  immaterial. 

A  study  of  the  bonds  authorized  by  the  railroad  commission  of  this 
State,  covering  light,  power,  gas,  water  and  telephone  properties  during 
1913  and  1914,  shows  that  the  5  per  cent  bonds,  aggregating  $21,468,000, 
were  sold  to  net  88.25  per  cent  of  their  par  value,  and  that  the  6  per  cent 
bonds,  aggregating  $8,359,200,  were  sold  to  net  91.25  of  their  par  value. 
Based  on  this  showing,  w«e  have  assumed  that  the  securities  covering  this 
property  could  be  sold  to  net  90  per  cent  of  their  par  value. 

The  cost  of  permanent  financing  will  be  as  follows :  — 

Total  value  of  plant,  consisting  of  all  items  down  to  and  including 

construction  in  process  (Fig.  6.),      ......  $8,592,475 

Cost  of  establishing  the  business, 2,292,954 

Working  capital,                    •  .    •                 .                    .                    .  221,513 

Cost  of  financing  during  construction,     ......  190,888 


Total  amount  to  be  financed  at  9  per  cent  of  par  value,      .          .     $11,297,830 
Discount,  or  cost  of  permanent  financing,        .....         1,255,314 


Total  securities  issued,   ........     $12,553,144 

Cost  of  permanent  financing,          .          .  .       $1,255,314 

This  means  that,  in  order  to  raise  the  total  amount  invested  in  the 
property  at  the  time  of  its  permanent  financing,  $11,297,830,  it  would  be 
necessary  to  issue  $12,553,144  worth  of  securities,  representing  a  cost  of 
permanent  financing  of  $1,255,314. 

129.  The  Total  Cost  of  Financing.  —  The  total  cost  of  financing, 
therefore,  will  be  made  up  of  — 

Cost  of  financing  during  construction,     .          .          .  $190,888 

Cost  of  permanent  financing,  .......         1,255,314 


Total  cost  of  financing,  ...  .       $1,446,202 

In  a  very  general  way  all  of  the  elements  component  to  the  total  repro- 
duction cost  of  a  telephone  property  have  been  discussed.  Many  of  the 
illustrations  of  methods  of  computing  the  items  of  collateral  cost  and 
the  tangible  values  have  been  taken  from  actual  appraisals.  Rather 
than  complicate  the  text  by  an  attempt  to  outline  all  of  the  possible 
methods  which  might  be,  or  have  been,  used,  the  writer  has,  in  each  case, 
selected  for  consideration  what  seemed  to  him  the  clearest  and  most 
plausible  method,  and  the  one  which  has  had  the  most  favorable  considera- 
tion at  the  hands  of  courts  and  commissions. 


CHAPTER  VII 
PRELIMINARY  STEPS   OF  INVENTORY 

130.  Preliminary  Steps  of  the  Inventory.  —  In  considering  the 
various  steps  involved  in  the  actual  preparation  of  an  appraisal,  it  is  well 
to  imagine  one's  self  in  the  position  of  an  engineer  about  to  undertake 
an  appraisement  problem.    There  is  such  a  vast  amount  of  detail  involved 
in  the  appraisal  of  even  the  smallest  telephone  property,  and  so  many 
different  angles  from  which  the  problem  may  be  viewed,  that  too  much 
stress  cannot  be  laid  upon  the  importance  of  thinking  out  each  step  most 
carefully  in  advance. 

As  a  matter  of  fact,  it  is  impossible  to  lay  down  any  specific  set  of 
rules  adequate  to  meet  the  individual  requirements  of  every  appraisement 
problem.  In  the  last  analysis,  success  inevitably  depends  upon  the  expe- 
rience, good  judgment  and  integrity  of  the  men  in  charge. 

Appraisals  cannot  be  made  by  novices,  no  matter  how  capable  they 
may  be  or  how  carefully  they  may  have  studied  up  on  the  subject  in 
hand.  Problems  are  constantly  arising,  both  in  the  taking  of  the  inventory 
and  in  the  appraisement,  that  require  the  experienced  supervision  of  men 
who  are  familiar  with  every  angle  of  the  appraisement  game.  In  sketching 
a  general  plan  of  procedure,  therefore,  an  effort  will  be  made  to  treat  the 
subject  broadly  and  to  obviate  confusing  detail. 

There  are  certain  preliminary  steps  which  have  to  be  gone  through  in 
advance  of  the  actual  appraisement  of  almost  any  telephone  property, 
and  these  may  be  summarized  as  follows :  — 

1.  Determination    of   purpose   of   appraisement  —  whether   for   rate 
adjustment,  financing  or  accounting  purposes. 

2.  Survey  of  conditions  by  engineer  in  charge. 

3.  Investigation  of  company's  records  by  engineer  in  charge. 

4.  Review  of  State  or  local  commission  instructions  governing  the 
preparation  of  appraisals. 

5.  Preparation  of  field  forms  —  determination  of  types  of  construction 
involved,  etc. 

6.  Selection  of  field  inspectors,  office  help,  etc. 

131.  Determination  of  Purpose  of  Appraisal.  —  There  are  several 
purposes  for  which^telephone  appraisals  may  be  required,  and  the  method 
of  appraisement  —  at  least  in  so  far  as  refinement  of  detail  is  concerned  — 
is  necessarily  dependent  upon  the  ultimate  use  to  which  the  appraisal  is 
to  be  put.    The  various  uses  may  be  summarized  as  follows:  — 


68         TELEPHONE  RATES  AND  VALUES 

1.  Appraisals  for  presentation  before  regulatory  bodies  in  rate  adjust- 
ment cases. 

2.  Appraisals  for  the  purpose  of  determining  the  fair  value  for  use  in 
financing. 

3.  Appraisals  for  use  as  a  basis  of  tax  adjustment. 

4.  Appraisals  for  accounting  purposes. 

The  first  question  that  confronts  the  appraisal  engineer,  therefore,  is: 
"  What  are  they  going  to  use  this  appraisal  for?" 

If  it  is  for  any  of  the  last  three  purposes,  much  of  the  detail  necessary 
for  a  commission  appraisal  may  be  eliminated.  The  reason  for  this  is 
obvious.  The  various  State  commissions  must  of  a  necessity  insist  upon 
a  strict  adherence  to  carefully  formulated  rules  as  to  form  of  appraisal, 
classification  of  materials,  grouping  of  summaries,  etc.;  otherwise  they 
would  continually  be  overwhelmed  with  a  heterogeneous  assortment  of 
data  difficult  to  assimilate  and  of  practically  no  use  to  any  one  except  the 
people  who  prepared  it. 

132.  Survey  of  Conditions.  —  Having  ascertained  the  use  to  which 
the  prospective  appraisal  will  be  put,  the  engineer  can  start  the  pre- 
paratory work  in  earnest.    First  will  come  a  general  inspection  of  the 
property  in  the  company  of  some  official  or  employee  who  is  thoroughly 
familiar,  not  only  with  the  geographical  layout  of  the  plant,  but  also  with 
the  construction  history  of  the  various  portions. 

If  the  property  is  a  large  one  the  inspection  will  necessarily  be  limited 
to  a  small  proportion  of  the  total.  In  this  event  a  special  effort  should 
be  made  to  cover  sections  that  are  typical  of  the  various  kinds  of  con- 
struction used  throughout  the  plant  as  a  whole. 

The  importance  of  this  preliminary  inspection  trip  cannot  be  exag- 
gerated. It  gives  the  engineer  an  idea  —  invaluable  in  his  later  work  — 
of  the  correlation  of  the  various  parts  of  the  property.  It  furnishes  an 
index  to  the  present  plant  conditions,  and  this  alone  is  worth  the  time 
involved.  It  paves  the  way  for  an  intelligent  unit  cost  study  by  affording 
an  opportunity  to  observe  general  topographical  and  soil  conditions  as 
well  as  railroad  shipping  facilities.  Last  but  not  least,  a  preliminary 
inspection  trip  affords  a  basis  for  an  intelligent  estimate  of  the  cost  of 
appraisement. 

133.  Investigation  of  Company's  Records.  —  After  the  preliminary 
inspection  trip  comes  the  review  of  the  company's  records  and  map  files. 
It  is  most  important  at  the  outset  to  ascertain  the  exact  condition  of  the 
records,  and  find  out  just  how  far  they  can  be  relied  upon  as  an  aid  to  the 
preparation  of  the  inventory. 

If  the  records  are  reasonably  accurate,  they  can  often  be  used  as  a  general 
check  on  the  field  work.  Of  course,  it  is  unwise  for  a  disinterested  engineer 
to  put  too  much  faith  in  the  company's  records,  —  if  the  appraisal  is 
being  made  for  commission  purposes,  and  he  is  to  be  required  to  sub- 


PRELIMINARY  STEPS  OF  INVENTORY  69 

stantiate  the  inventory  on  the  witness  stand,  —  but  a  comparison  of  the 
company's  records  with  the  field  notes  may  be  invaluable  in  pointing  out 
doubtful  items  which  should  be  rechecked  in  the  field. 

Maps  of  the  outside  plant  layout  should  be  gone  over  carefully,  with 
a  view  to  determining  their  possible  usefulness  in  connection  with  the 
field  work.  Nothing  helps  so  much  in  an  inventory  of  the  outside  plant 
of  a  telephone  company  as  a  good  set  of  plans  showing  the  location  of  the 
pole,  aerial  cable  and  underground  systems. 

The  use  of  such  maps  will  obviate  loss  of  time  on  the  part  of  the  field 
men  in  finding  and  identifying  the  company's  property. 

134.  Review  of  State  or  Local  Commission  Instructions.  —  If 
the  appraisal  is  for  presentation  before  a  commission,  or  if  there  is  the 
slightest  possibility  of  its  ever  being  put  to  that  use,  the  greatest  care 
should  be  taken  to  see  that  the  appraisal  conforms  to  commission  require- 
ments in  every  detail. 

A  careful  study  by  the  appraisal  engineer  of  all  available  instructive 
literature  issued  by  the  commission  may  obviate  subsequent  needless 
expenditures  of  time  and  money  in  rearranging  the  data.  Of  course,  if 
the  appraisal  is  not  to  be  used  for  commission  purposes,  the  engineer  may 
use  his  judgment  as  to  form  of  presentation.  Even  in  this  case,  though, 
it  is  best  to  adhere  strictly  to  the  accounting  instructions  of  the  Interstate 
Commerce  Commission. 

135.  Preparation  of  Field  Forms.  —  The  subject  of  the  preparation 
of  the  field  forms  will  be  discussed  more  in  detail  later.    For  the  present, 
suffice  it  to  say  that  the  expenditure  of  time  and  thought  in  the  drafting 
of  suitable  forms  for  recording  the  data  will  undoubtedly    appreciably 
lessen  the  cost,  and  greatly  increase  the  efficiency,  of  the  appraisal. 

The  forms  should  be  comprehensive  enough  to  cover  all  possible  needs 
and  yet  provide  for  the  elimination  of  detail  not  absolutely  essential  to 
the  success  of  the  appraisal. 

136.  Field  Inspectors  and  Office  Help.  —  The  next  problem  con- 
fronting the  appraisal  engineer  involves  the  selection  of  field  and  office 
help.    The  selection  of  suitable  men  for  taking  the  inventory  in  the  field  is 
extremely  important,  especially  in  the  appraisal  of  the  large  property,  where 
a  very  close  supervision  by  the  engineer  in  charge  is  out  of  the  question. 

The  two  essential  qualifications  for  field  inspectors  are  knowledge  of 
outside  telephone  plant,  and  the  ability  to  record  observations  neatly  and 
accurately. 

It  has  been  the  writer's  experience  that  the  more  intelligent  class  of 
telephone  linemen  and  troublemen  make  the  best  inspectors.  It  is  often 
possible  to  pick  up  men  who  are  thoroughly  familiar  with  outside  telephone 
construction,  and  who  have  had  sufficient  previous  experience,  either  as 
assistant  foremen  or  timekeepers,  to  enable  them  to  satisfactorily  record 
the  data. 


70         TELEPHONE  RATES  AND  VALUES 

It  is  interesting  to  note  that  there  is  a  large  class  of  telephone  "floaters" 
who  make  the  very  best  kind  of  inventory  men.  As  a  rule,  these  men  are 
intelligent,  have  had  a  good  deal  of  telephone  experience,  and  are  capable 
of  hard  and  conscientious  work  for  months  at  a  time,  although  they  may 
lack  the  staying  power  to  make  them  successful  employees  of  an  operating 
company. 

137.  Selection  of  Inventory  Help. —  In  selecting  field  inspectors, 
the  following  plan  is  suggested:    pick  out  a  typical  pole  line  carrying 
one  or  more  aerial  cables  and  several  arms  of  wire,  —  if  possible,  both 
copper  and  iron  of  various  gauges,  —  and  having  the  usual  equipment  of 
anchors,  guys,  side-arm  braces,  etc. 

First,  make  a  careful  inventory  of  this  line.  Then  send  each  of  the 
applicants  out,  provided  with  suitable  forms,  without  of  course  advising 
them  that  an  inventory  has  already  been  taken  of  the  line  in  question. 
A  comparison  of  the  results  obtained  by  the  applicants  with  the  original 
inventory  will  afford  an  excellent  means  of  ascertaining  the  general  fitness 
of  the  men  in  question. 

In  a  previous  installment  reference  was  made  to  the  necessity  of  careful 
supervision  of  the  work  of  the  outside  men.  The  work  should  be  so 
arranged  that  the  appraisal  engineer,  or  one  of  his  immediate  assistants, 
will  be  able  to  spend  at  least  half  of  each  day  in  reviewing  in  the  field  the 
completed  work  of  the  field  inspectors.  Of  course,  as  the  appraisal  pro- 
gresses and  the  men  become  more  proficient,  the  amount  of  supervision 
may  be  reduced. 

In  selecting  office  help  the  prime  requisites  are  neatness  and  accuracy. 
A  knowledge  of  telephone  work,  while  helpful,  is  not  absolutely  necessary, 
especially  as  all  of  the  office  work  will  be  done  under  the  direct  supervision 
of  the  appraisal  engineer  or  one  of  his  immediate  assistants. 

138.  Utilization  of  Company  Employees  on  Appraisal  Work.  — 
At  first  thought  it  may  seem  that  a  real  economy  may  be  effected  by 
utilizing  company  employees  on  appraisal  work,  especially  during  dull 
times,  when  the  men  may  be  assigned  to  the  appraisal  job  during  clear 
weather  and  allowed  to  clean  up  their  own  routine  work  when  the  weather 
is  unfavorable  for  inventory  work  in  the  field. 

Experience  has  proven,  however,  that  the  best  results  cannot  be  secured 
in  this  way.  In  the  first  place,  the  men  are  apt  to  slight,  perhaps  un- 
consciously, temporary  inventory  work  in  favor  of  the  permanent  job  in 
which  they  are  naturally  more  interested. 

Again,  men  permanently  employed  by  the  company  are  likely  to  be 
too  optimistic  in  judging  present  condition  of  the  plant  and  in  ascertaining 
the  ownership  of  jointly  occupied  poles.  A  stranger  to  the  property  is 
much  more  likely  to  probe  a  questionable  point  to  the  bottom  than  to 
decide,  perhaps  unconsciously,  in  favor  of  the  company  whose  plant  he 
is  appraising.  A  still  further  objection  to  the  carrying  on  of  the  inventory 


PRELIMINARY  STEPS  OF  INVENTORY  71 

work  by  company  employees  is  found  in  the  fact  that  appraisals  made  in 
this  manner  almost  invariably  require  a  longer  time  for  completion,  and 
necessarily  become  a  sort  of  side  issue  to  the  regular  business  of  the  com- 
pany. 

Unquestionably  the  best  results  in  the  inventory  and  appraisement  of 
a  telephone  property  can  only  be  obtained  through  intensive  methods,  — 
by  giving  the  problem  in  hand  undivided  attention  until  it  is  completed. 

139.  Interstate  Commerce  Commission's  Classification  of  Tele- 
phone companies.  —  Having  completed  the  preliminary  steps  as  have 
been  outlined,  the  actual  work  of  the  inventory  should  progress  rapidly. 

Unless  it  is  found  necessary  to  conform  with  special  rules  laid  down  by 
local  or  State  regulatory  bodies,  it  will  be  advantageous  to  adhere  as 
closely  as  possible  to  the  accounting  system  of  the  Interstate  Commerce 
Commission. 

It  will  be  remembered  that  the  instructions  for  telephone  accounting 
provide  for  the  classification  of  telephone  companies  according  to  the 
amount  of  annual  operating  revenue,  as  follows :  — 

Class  A.  —  Companies  having  average  annual  operating  revenues 
exceeding  $250,000. 

Class  B.  —  Companies  having  average  annual  operating  revenues  ex- 
ceeding $50,000  but  not  more  than  $250,000. 

Class  C.  —  Companies  having  average  annual  operating  revenues 
exceeding  $10,000  but  not  more  than  $50,000. 

Class  D.  —  Companies  having  average  annual  operating  revenues  of 
$10,000  or  less. 

140.  Accounting    Instructions    of    the    Interstate    Commerce 
Commission.  —  Detailed  accounting  instructions  have  been  issued  for 
Class  A,  B  and  C  companies,  but  up  to  the  present  time  no  specific  pro- 
vision has  been  made  for  Class  D  companies.    The  instructions  which 
follow,  for  inventorying  a  telephone  property,  have  been  based  upon  the 
system  of  accounts  prescribed  for  Class  A  and  B  companies.     Having 
once  gained  a  thorough  understanding  of  the  method  of  procedure  for 
the  larger  companies,  the  reader  can  readily  make  such  changes  as  may 
be  necessary  to  adapt  this  suggested  method  of  procedure  to  meet  the 
needs  of  the  smaller  companies  falling  under  Classes  C  and  D. 

Referring  to  the  summary  of  the  inventoriable  property,  Fig.  11,  the 
inventory  of  the  various  portions  of  plant  will  be  considered  in  the  order 
which  would  naturally  be  taken.  The  discussion  of  each  phase  of  the 
inventory  will  be  prefaced  with  a  review  of  the  instructions  issued  by  the 
Interstate  Commerce  Commission. 


72 


TELEPHONE  RATES  AND  VALUES 


Total 

inventoriable 

property. 


Land  and  buildings,  I.  C.  C.  account  210 


Land,  I.  C.  S.  sub-account  211. 
Buildings,  I.  C.  S.  sub-account  212. 


Central  office  equipment,  /  Central  office  telephone  equipment,  sub-account  212. 
I.  C.  C.  account  220.       I  Other  equipment  of  central  offices,  sub-account  222. 

f  Station  apparatus,  sub-account  231. 

Q.    .•  .    T   r*   r~i   I  Station  installations,  sub-account  232. 

arronntQ2$m       '  Interior  block  wires,  sub-account  233. 

Private  branch  exchanges,  sub-account  234. 
[  Booths  and  special  fittings,  sub-account  235. 

•PIT        f  Exchange,  I.  C.  C.  account  241. 
Pole  lines  |  Toll)  L  c  c  account  251 

»     •  i      ,,    f  Exchange,  I.  C.  C.  account  242. 
Aerial  cable  j  Tollj  L  c  c  account  352. 

.     .  ,     •      f  Exchange,  I.  C.  C.  account  243. 
Aerial  wire  |  Tollj  L  c  c  account  253. 

Underground  conduits  {  fxchang^,  L  C.  C^ccount  244. 


Exchange,  I.  C.  C.  account  245. 
Toll,  I.  C.  C.  account  255. 


Underground  cable 

Exchange,  I.  C.  C.  account  246. 


Submarine  cable 


Toll,  I.  C.  C.  account  256. 

f  Office  furniture  and  fixtures,  I.  C.  C.  sub-account  261. 
General  shop  equipment,  I.  C.  C.  sub-account  262. 


General  equipment,  I.  J  General  store  equipment,  I.  C.  C.  sub-account  263. 

C.  C.  account  260.         1  General  stable  and  garage  equipment,  I.  C.  C.  sub-ac- 

\      count  264. 

[  General  tools  and  implements,  I.  C.  C.  sub-account  265. 

Material  and  supplies,  I.  C.  C.  account  122. 
Right  of  way,  I.  C.  C.  account  207. 
FIG.  11.  —  Summary  of  inventoriable  property  of  a  telephone  plant. 


CHAPTER  VIII 
THE  INVENTORY  OF  REAL  ESTATE  AND   EQUIPMENT 

141.  Land,  Interstate  Commerce  Commission,  Account  211.  — 

"This  account  should  include  the  cost  of  all  land  and  interests  in  land, 
other  than  right  of  way,  acquired  for  use  in  the  operation  of  the  telephone 
plant,  such  as  land  occupied  by  general  and  central  offices,  shops,  stables, 
garages,  storehouses,  etc.  It  includes  the  cost  of  examination  and  regis- 
tration of  title  conveyancer's  and  notary's  fees,  purchasing  agent's  com- 
missions or  proportion  of  purchasing  agent's  salary,  taxes  accrued  to 
date  of  transfer  of  title,  and  all  liens  upon  the  title,  when  such  costs  are 
assumed  or  paid  by  the  purchaser  in  his  own  behalf;  cost  of  assessments 
for  public  improvements  which  add  to  the  value  of  the  lands  but  which 
are  not  the  property  of  the  accounting  company;  cost  of  grading  land 
when  not  done  in  connection  with  buildings;  and  costs  of  obtaining  con- 
sents and  payments  for  abutting  damages  and  expenses  of  condemnation 
proceedings." 

This  account  should  also  include  the  first  cost  of  acquiring  leaseholds 
of  land,  other  than  for  right  of  way,  the  terms  of  which  are  more  than  one 
year  each,  whether  acquired  through  direct  lease,  assignment  or  otherwise 
(but  not  including  the  rents  paid  periodically  in  consideration  of  rights 
obtained  under  such  leases).  If  any  such  leasehold  is  acquired  by  assign- 
ment the  charge  to  this  account  must  not  exceed  the  amount  actually 
paid  therefor  by  the  accounting  company  to  the  assignor. 

Courts  and  commissions  have  almost  universally  ruled  that  the  appraisal 
of  land  should  be  made  by  a  qualified  real  estate  expert,  and  not  either 
by  the  company  submitting  the  appraisal  or  a  consulting  engineer.  It  is 
well,  therefore,  to  retain  a  local  real  estate  man  who  is  thoroughly  familiar 
with  real  estate  values  in  the  community  in  question,  and  have  him 
submit  a  detailed  description  and  valuation  of  all  land  to  be  included  in 
the  appraisal. 

The  appraisal  of  the  land  as  submitted  by  the  real  estate  man  should, 
of  course,  be  carefully  checked  by  the  appraisal  engineer  as  to  general 
reasonableness.  As  a  rule,  this  may  be  easily  accomplished  by  a  com- 
parison with  adjoining  land  values,  especially  if  property  in  the  immediate 
vicinity  of  the  appraisal  under  consideration  has  changed  hands  at  or  near 
the  date  of  appraisal. 

142.  Evaluation  and  Description  of  Land.  —  In  reviewing  the  two 
methods  of  evaluating  real  estate  —  the  expert  method  and  the  compara- 


74         TELEPHONE  RATES  AND  VALUES 

tive  method  —  Henry  Floy,  in  "  Valuation  of  Public  Utility  Properties," 
page  73,  says:  — 

Some  argument  has  been  advanced  that  the  proper  basis  of  valuation  is  the 
assessed  value,  but  as  such  value  is  usually  a  conservative  and  "hard  times"  value, 
below  the  price  at  which  property  can  be  purchased  under  ordinary  conditions,  it 
is  not  a  proper  basis  of  valuation,  except  for  taxation  purposes,  where  the  real 
estate  of  corporations  should  be  placed  on  the  same  basis  as  other  real  estate. 

An  appraised  value  of  real  estate,  which  depends  upon  the  opinion  of  experts, 
will  usually  be  found  to  be  a  variable  quantity.  While  the  best  experts  base  their 
opinions  on  some  knowledge  of  actual  transfers,  a  large  element  of  personal  judg- 
ment usually  enters  into  their  conclusions. 

Probably  the  safest  method  to  pursue  in  determining  the  perplexing  question  of 
land  value  is  based  on  a  study  and  comparison  of  bona  fide  sales  of  land  adjoining 
or  near  the  property  being  valued.  In  many  instances,  however,  such  a  method 
cannot  be  used  in  that  property  which  may  have  been  held  for  years,  in  large  tracts, 
without  change  of  ownership.  Under  such  circumstances  the  judgment  of  the 
real  estate  expert  is  probably  as  fair  a  guide  as  can  be  used  in  determining  values. 

The  following  is  an  illustration  of  the  method  of  describing  land  as 
adopted  in  a  recent  telephone  appraisement :  — 

Main  Central  Office. 

Location:   Corner  Eighth  and  Cedar  streets. 

Description:  Lot  No.  3,  block  No.  13,  and  portion  of  lot  No.  2,  block  No.  13, 
lying  westerly  of  the  easterly  line  of  lot  No.  3,  extended  to  Ninth  Street,  of  Roberts 
&  Randall's  addition,  extension  to  city  of  —  . 

143.  Buildings,  Interstate  Commerce  Commission,  Account 
212.  —  "This  account  should  include  the  cost  of  all  buildings,  such  as 
general  and  central  offices,  shops,  stables,  garages,  storehouses,  etc., 
devoted  to  the  general  purposes  of  the  company;  also  of  all  permanent 
fixtures,  such  as  water,  steam  and  gas  pipes  and  fixtures;  electric  wiring 
and  fixtures  for  lighting,  signaling,  etc.;  elevators  and  the  engines  and 
motors  specially  provided  for  operating  them;  furnaces,  boiler  and  other 
apparatus  provided  for  producing  steam  for  such  engines  and  for  heating; 
electric  generators  specially  provided  for  producing  current  for  lighting 
such  buildings,  etc. 

"This  account  includes  such  piers  and  other  foundations  for  machinery 
and  apparatus  as  are  designed  to  be  as  permanent  as  the  buildings  in 
(or  in  connection  with)  which  they  are  constructed,  and  to  outlast  the 
first  machinery  or  apparatus  mounted  thereon.  It  also  includes  the  cost 
of  real  estate  brokers'  commissions,  examinations  and  registrations  of 
titles  and  other  expenses,  such  as  architects'  fees,  supervision,  etc.,  incident 
to  the  construction  or  purchase  of  buildings,  and  the  cost  of  grading  and 
of  sidewalks,  fences,  hedges,  etc.,  on  grounds  used  in  connection  with  such 
buildings. 

"It  does  not  include  any  telephone  equipment,  wiring  or  apparatus  for 
generating  or  controlling  electricity  for  operation  of  the  telephone  system." 


INVENTORY  OF   REAL  ESTATE  AND  EQUIPMENT      75 

Many  of  the  State  commissions  have  held  that  the  appraisal  of  build- 
ings should  not  fall  within  the  jurisdiction  of  the  engineer  in  charge  of 
a  public  utility  appraisal.  Most  engineers  are  perfectly  competent  to 
make  accurate  valuations  of  telephone  buildings,  but,  to  be  on  the  safe 
side,  it  is  better  to  call  in  either  an  architect  or  a  building  contractor,  and 
obtain  a  detailed  description  of  the  building,  together  with  cost  of  repro- 
duction new  and  present  value. 

As  in  the  case  of  the  land,  building  valuations  so  determined  should  be 
carefully  checked  by  the  appraisal  engineer. 

144.  The  Selection  of  the  Building  Appraiser.  —  In  selecting  the 
architect  or  contractor  who  is  to  appraise  the  buildings,  it  should  be 
remembered  that  telephone  buildings  are  in  a  class  by  themselves,  and 
that  the  ordinary  building  contractor,  unless  he  has  had  previous  ex- 
perience in  telephone  work,  may  not  be  competent  to  make  a  valuation 
of  this  nature.    Whenever  possible  the  architect  or  the  contractor,  who 
was  connected  with  the  construction  of  the  building  under  consideration, 
should  be  retained. 

In  this  connection  there  is  one  point  that  deserves  most  careful  con- 
sideration. The  line  of  demarcation  between  the  central  office  manhole, 
or  vault,  and  the  building  proper  is  often  difficult  to  determine.  In  many 
instances  the  vault  runs  into  the  cellar  of  the  building.  Wherever  possible 
in  cases  of  this  kind  the  history  of  the  building  should  be  reviewed. 

If  the  cable  vault  was  built  by  the  general  building  contractor  and 
charged  to  the  building  account  it  should,  of  course,  be  included  as  a  part 
of  the  building.  If,  however,  the  manhole  or  vault  was  built  after  the 
building  itself,  or  was  charged  to  the  underground  conduit  account,  it 
should  be  inventoried  as  a  part  of  the  conduit  system. 

145.  Description  of  Buildings.  —  The  description  of  the  buildings, 
as  incorporated  into  the  completed  appraisal,  should  take  somewhat 
the  following  form :  — 

North  Central  Office  Building. 

Location:   No.  2010  and  2012  Third  Street,  N. 

Size:   (Original)  38  feet  by  68  feet,  (Addition)  40  feet  by  50  feet. 

Description:  (Original)  One  story  and  basement,  brick  walls,  wooden  joist 
floors,  wooden  lath  ceiling.  (Addition)  One  story  and  basement,  brick  walls  with 
tile  furring,  8  feet  tile  and  5  feet  reinforced  concrete  beam  floors,  metal  lath  ceiling, 
5  feet  tile  and  5  feet  reinforced  beam  roof. 

146.  Inside   and   Outside   Plant.  —  In   the   consideration   of   the 
central  office  and  subscribers'   equipment,   the   apparatus  and  wiring 
inside  the  buildings  is  treated.    This,  however,  does  not  include  what  is 
known  as  "  house  cable."    Block  wiring  and  pole  line  equipment  will  be 
considered  as  part  of  a  separate  chapter  in  order  to  segregate  the  inside 
plant  from  the  outside  plant. 


76         TELEPHONE  RATES  AND  VALUES 

147.  Central    Office,    Telephone    Equipment,    Account   221.  — 

"This  account  should  include  the  cost  of  local  and  toll  switchboards,  chief 
operators',  monitors'  and  supervisors'  desks  and  tables,  wire  chiefs'  test- 
ing outfits,  main  and  intermediate  frames,  cables  and  jumper  wires,  call 
registers  or  meters,  relay  racks  and  coil  racks,  and  power  plants,  including 
rectifiers,  generators,  engines,  motors,  batteries,  power  switchboards, 
meters  and  fuse  boards;  telephone  and  telegraph  instruments  and  other 
electrical  instruments  and  apparatus  in  the  central  office  devoted  to  the 
operation  of  the  telephone  plant." 

The  inventory  of  the  central  office  telephone  equipment  is  necessarily 
a  rather  complicated  problem.  Naturally,  the  method  followed  will  be 
largely  dependent  upon  the  size  of  the  office  and  the  type  of  equipment 
involved. 

148.  General  Classification  of  Central  Office  Equipment  and 
Inventory  Detail.  —  The  following  extract  from  a  recent  appraisal  will 
give  an  idea  of  the  general  classification  of  the  central  office  equipment 
and  of  the  amount  of  detail  necessary  in  the  inventory :  — 

Switchboard. 

Type:  Kellogg  common  battery;  full  multiple  lamp  signal,  3-position,  6-panel 
sections. 

Capacity:  Two  thousand  four  hundred  multiple  subscribers'  lines,  600  answering 
jacks  (per  section). 

Equipment:  (1)  Toll  section  equipped  with  1,100  subscribers'  multiple  jacks, 
40  rural  multiple  jacks,  20  L.  D.  multiple  jacks,  10  special  multiple  jacks,  16  L. 
D.  answering  jacks,  1  calculagraph  and  2  toll  operators'  positions.  Each  toll 
operator's  position  is  equipped  with  8  pairs  toll  cord  circuits.  Rural  and  location 
section  equipped  with  1,100  subscribers'  multiple  jacks,  10  rural  multiple  jacks,  50 
special  multiple  trunk  jacks,  60  rural  answering  jacks,  170  local  answering  jacks, 
and  2  rural  and  local  operators'  positions.  Each  of  the  rural  operators'  positions 
is  equipped  with  15  pairs  rural  cord  circuits,  and  the  local  position  is  equipped  with 
15  pairs  local  cord  circuits. 

(2)  Local  sections  each  equipped  with  1,100  subscribers'  multiple  jacks  and  50 
special  multiple  trunk  jacks.  These  two  sections  are  also  equipped  with  950  local 
answering  jacks,  4  regular  operators'  positions,  and  1  special  operator's  position. 
Each  of  the  regulator  operators'  positions  is  equipped  with  15  pairs  local  cord  cir- 
cuits, and  the  special  operator's  position  with  9  pairs  local  cord  circuits  and  1 
test  cord  circuit. 

Description. 

Frames  and  Racks:  One  wall  type  main  frame  equipped  with  2,800  7-D  fuses 
and  mountings,  28  50-pair  terminal  strips. 

One  combination  main  and  intermediate  distributing  frame.  Capacity:  1,600 
pairs  protectors,  2,000  pairs  cable  terminals,  1,600  pairs  jack  terminals.  Equip- 
ment: 1,300  pairs  protectors,  2,025  pairs  cable  terminals,  1,320  pairs  answering 
jack  terminals. 

Desks:  One  one-position  wire  chief's  desk;  one  one-position  chief  operator's 
desk. 

Power  Plant:  One  storage  battery  (chloride  accumulator),  consisting  of  11  F-9 
elements  and  11  F-17  lead-lined  wood  tanks;  one  50-ampere  mercury  arc  rectifier, 


INVENTORY  OF  REAL  ESTATE  AND  EQUIPMENT     77 

one  power  switchboard  with  necessary  switches  and  instruments;  one  main  fuse 
board ;  one  service  fuse  board ;  one  Holtzer-Cabot  harmonic  ringer  converter  (four 
frequency);  four  harmonic  test  bells;  one  fuse  panel,  capacity  360  fuses,  equipped 
with  260  fuses  and  mountings. 

There  is  such  a  marked  difference  between  the  various  types  of  central 
office  equipment  that  it  is  almost  impossible  to  prescribe  standard  inven- 
tory forms.  In  many  cases  forms  will  not  be  necessary.  The  description 
of  the  boards,  racks  and  auxiliary  equipment  may  be  made  in  list  form, 
as  suggested  in  the  foregoing  paragraphs.  It  is  always  well,  however,  to 
make  a  detailed  diagram  of  the  front  of  the  board,  showing  relative  loca- 
tion of  answering  jacks,  multiple  jacks,  etc. 

149.  Other   Equipment   of   Central    Offices,    Account    222.- 
"This  account  should  include  the  cost  of  furniture  and  equipment  (other 
than  telephone  equipment)  in  central  offices  for  the  operating  forces. 
This  account  includes  the  furniture  and  equipment  in  operators'  rest  and 
lunchrooms,  and  in  operators'  schools." 

The  foregoing  quotation  from  the  accounting  instructions  of  the  Inter- 
state Commerce  Commission  clearly  defines  the  character  of  the  equip- 
ment which  should  be  included  under  the  heading,  "  Other  Equipment 
of  Central  Offices."  All  equipment  should  be  summarized  in  list  form, 
leaving  space  at  the  right-hand  side  of  each  sheet  for  unit  costs  and  total 
costs. 

150.  Station  Apparatus,   Account  231.  —  "This  account  should 
include  the  cost  of  station  apparatus,  such  as  telephone  sets,  intercom- 
municating sets,  bells,  backboards,  desk  stands,  coin  boxes,  protectors, 
battery  boxes,  initial  batteries  and  cords,  special  station  switching  de- 
vices not  otherwise  classified,  and  telephone  and  telegraph  instruments  or 
parts  thereof  when  owned  by  the  company  and  installed  for  service." 

It  is  obviously  out  of  the  question  to  inspect  all  of  the  equipment 
falling  under  the  heading  of  station  apparatus.  A  house  to  house  canvass 
of  the  subscribers'  instruments  would  be  very  expensive  and  the  resulting 
slight  increase  in  accuracy  of  appraisement  negligible. 

Many  companies  maintain  reliable  records  as  to  type  of  equipment, 
and  the  use  of  these  records  —  supplemented  by  a  field  check  of,  say, 
5  or  10  per  cent  of  the  total  number  of  instruments  involved  —  should 
give  sufficient  data  for  the  appraisement  of  the  station  apparatus.  How- 
ever, if  there  are  no  records,  or  if  the  existing  records  are  found  to  be 
unreliable,  a  larger  percentage  of  the  total  should  be  checked  in  the  field, 
—  10  or  15  per  cent.  This  check  is  merely  for  the  purpose  of  gaining  an 
idea  of  the  proportion  of  the  various  types  and  makes  of  instruments 
existent  throughout  the  plant. 

The  Interstate  Commerce  Commission's  accounting  requirements  are 
stringent  enough  to  insure  a  reasonable  degree  of  accuracy  in  the  total 
number  of  subscribers'  stations  carried  on  the  company's  books,  and  the 


78 


TELEPHONE  RATES  AND  VALUES 


auditor's  record  of  the  number  of  stations  can  usually  be  accepted  without 
question. 

151.  Field  Form  for  Subscriber  Station  Data.  —  A  field  form 
similar  to  Form  No.  1  will  be  found  helpful  in  gathering  the  data  relating 
to  the  subscribers'  stations.  It  will  be  noted  that  this  form  also  provides 
for  the  tabulation  of  data  relating  to  interior  wiring  —  Station  Installa- 
tions, Account  232  —  and  drop  wiring.  The  drop  wiring  is  really  a  part 
of  Exchange  Aerial  Wire,  Account  243,  and  should  be  included  under  this 
head  in  the  inventory. 

For  purposes  of  convenience,  however,  data  relating  to  these  two 
latter  items  —  subscribers'  installations  and  drop  wiring  —  can  be  most 
effectively  compiled  by  the  field  man  who  inspects  the  subscribers'  in- 
struments. Provision  has  therefore  been  made  in  Fig.  12  for  recording 
these  data,  together  with  those  for  the  subscribers'  instruments. 


AT 


5r/(T/O/V 
SHEET  A/0. 


Off 


NO  NO  W 


rr 


rr 


Ht  MHO 


HELD  WOAK 


BY 


COMP/LZD  a* 


FIG.  12.  —  Data  sheet  for  tabulating  the  inventory  of  subscriber's  station  equipment. 

152.  Inspection  of  Subscribers'  Equipment  and   Wiring.  —  In 

making  the  inspection  of  the  subscribers'  equipment  and  wiring,   the 
following  points  should  be  carefully  noted  by  the  field  inspector:  — 


Instruments. 

Make  of  instrument  —  Stromberg-Carlson,  Kellogg,  etc. 
Manufacturer's  code  number,  if  any. 

Type  of  instrument  —  long  back  wall  hotel  type,  wall  or  desk. 
Condition  of  instrument. 


INVENTORY  OF   REAL  ESTATE   AND   EQUIPMENT      79 

Interior  Wiring. 
Gauge  and  type  of  wire  used. 
Length  of  wire. 
Kind  of  ground  wire  used. 
Length  of  ground  wire. 
Size  and  type  of  ground  rod. 

Amount  and  kind  of  miscellaneous  material  used,  such  as  protectors,  knobs, 
staples,  connecting  block,  etc. 
Condition  of  interior  wiring. 

Drop  Wiring. 

Type  of  wire  used,  whether  No.  12  bare  wire,  No.  14  copper  twisted-pair,  No. 
14  weatherproof  single  wire  or  No.  17  copper-clad  steel  twisted-pair. 

Length  of  drop,  from  subscriber's  house  to  nearest  point  of  attachment  on  pole 
line. 

Amount  and  kind  of  miscellaneous  material,  such  as  knobs,  wood  brackets, 
Philadelphia  brackets,  etc. 

Condition  of  drop  wiring. 

The  purpose  of  these  data,  it  will  be  remembered,  is  merely  for  use  in 
ascertaining  the  average  conditions  existent  throughout  the  plant,  as 
an  aid  in  the  subsequent  compilation  of  the  unit  costs.  The  total  number 
of  instruments  and  installations  will  be  determined  entirely  from  the 
records  and  the  total  number  of  drops,  either  from  the  records  or  in 
connection  with  the  inventory  of  exchange  aerial  wire. 

153.  Station  Installations,  Account  232.  —  "This  account  should 
include  the  cost  of  installing  apparatus  and  the  cost  of  inside  wire,  that 
is,  the  wires  (or  cables)  from  the  instruments  to  the  point  of  entrance  to 
the  building,  where  the  drop  wires  or  interior  block  wires  terminate;  or 
to  the  junction  boxes,  where  the  house  cable  or  other  cable  terminates, 
including  wires  on  the  same  premises  to  connect  main  and  extension 
stations;   or  to  connect  the  private  branch  exchange  distributing  frames 
with  their  terminal  stations." 

The  method  of  appraisement  of  the  equipment  falling  under  the  heading 
of  "Station  Installations"  has  been  previously  outlined  in  detail  under 
the  head  of  "Station  Apparatus,  Account  231." 

154.  Private  Branch  Exchanges,  Account  234.  —  "This  account 
should  include  the  cost  of  private  branch  exchange  switchboards,  their 
distributing  frames,  the  cables  connecting  such  switchboards  and  distrib- 
uting frames,  and  the  cost  of  installation." 

All  of  the  private  branch  exchanges  should  be  actually  inspected  by  a 
man  thoroughly  familiar  with  this  type  of  equipment,  and  sufficient 
data  collected  to  facilitate  an  accurate  description  of  the  individual 
boards.  In  this  connection  it  should  be  noted  that  the  cable  extending 
from  the  P.  B.  X.  board  to  the  nearest  terminal  should  be  inventoried  and 
appraised  as  a  part  of  the  P.  B.  X.  equipment,  and  not  as  a  part  of  the 
house  or  block-cable  plant. 


80         TELEPHONE  RATES  AND  VALUES 

It  is  hardly  necessary  to  go  into  further  detail  on  the  subject  of  P.  B. 
X/s,  as  nearly  all  of  the  boards  used  are  of  standard  type  and  may  readily 
be  identified. 

155.  Booths  and  Special  Fittings,  Account  235.  —  "This  account 
should  include  the  cost  of  booths  and  special  fittings,  such  as  desks,  chairs, 
fans  and  cash  registers,  and  the  cost  of  installation." 

If  the  company's  records  are  reasonably  accurate,  it  is  usually  unneces- 
sary to  make  a  detailed  inspection  of  the  equipment  filed  under  the  classi- 
fication, "Booths  and  Special  Fittings."  An  inspection  should  be  made 
of  a  large  enough  proportion  of  this  equipment  to  furnish  a  check  on  the 
records,  and  to  afford  sufficient  data  as  to  type  of  equipment  for  use  in 
the  preparation  of  unit  costs. 


CHAPTER  IX 
THE   OUTSIDE  PLANT  INVENTORY 

156.  Classification  of  Interior  Block  Wires.  —  Referring  again  to 
the  summary  of  the  inventoriable  property,  Fig.  11,  it  will  be  seen  that 
general  account  230,  Station  Equipment,  includes  not  only  the  station 
equipment  proper  with  its  wiring,  but  also  the  so-called  Interior  Block 
Wires,  Account  233. 

The  interior  block  wires  are  really  a  portion  of  the  outside  plant.  In 
fact,  they  are  merely  a  substitute  for  drop  wires  used  in  connection  with 
block  cable  —  a  part  of  exchange  underground  cable,  account  245  — 
placed  along  building  walls  and  rear  fences  in  the  more  congested  portions 
of  the  larger  towns  and  cities.  For  this  reason  the  discussion  of  interior 
block  wires  is  given  in  the  present  chapter  rather  than  in  the  foregoing 
chapter,  which  treated  all  of  the  other  items  included  under  the  general 
caption  Station  Equipment,  Account  230. 

157.  Interior  Block  Wires,  Account  233.  — "This  account  should 
include  the  cost  of  interior  block  wires  (or  cables)  from  the  point  of  en- 
trance to  the  building,  where  connection  is  made  with  the  inside  wires,  to 
the  point  of  connection  with  the  permanent  circuits  at  the  terminals 
(block  cable  boxes)  of  the  subsidiary  underground  cable  or  subsidiary 
aerial  cable." 

The  relative  number  of  interior  block  wires  is  usually  small,  except 
perhaps  in  very  large  cities.  In  the  towns  and  smaller  cities  the  interior 
block  distribution  system  is  used  only  throughout  the  more  congested 
district. 

The  accounting  instructions  on  the  subject  of  block  wires  are  slightly 
confusing  in  that  they  define  interior  block  wires  as  the  "wires  (or  cables) 
from  the  point  of  entrance  to  the  building,  where  connection  is  made 
with  the  inside  wires,  to  the  point  of  connection  with  the  permanent 
circuits  at  the  terminals  (block  cable  boxes)  of  the  subsidiary  underground 
cable  or  subsidiary  aerial  cable." 

158.  Cable  and  Block  Wires.  —  The  writer  believes  that  the  question 
of  including  cable  as  block  wire  should  be  left  to  the  discretion  of  the 
appraisal  engineer.     If  the  amount  of  cable  involved  is  small  and  the 
cable  is  used  merely  as  a  substitute  for  an  equivalent  amount  of  block 
wiring,  then  unquestionably  it  should  be  inventoried  under  the  233 
account  as  block  wiring. 

As  an  illustration,  suppose  that  the  interior  wiring  for  ten  subscribers 
in  an  apartment  house  is  terminated  on  connector  blocks  in  the  basement 


82         TELEPHONE  RATES  AND  VALUES 

of  the  building,  and  that  the  nearest  terminal  of  the  underground  cable 
system  is  located  on  an  adjoining  building  wall  several  hundred  feet 
distant.  If,  instead  of  running  ten  block  wires  between  the  connector 
blocks  in  the  basement  and  the  terminal,  the  company  sees  fit  to  place 
a  piece  of  10-pair  Okonite  or  switchboard  cable,  then  the  cable  may  be 
properly  classed  as  block  wiring,  inasmuch  as  it  is  used  in  lieu  of  an  equiva- 
lent amount  of  twisted  pair. 

On  the  other  hand,  under  a  strict  interpretation  of  the  accounting 
instructions,  a  larger  cable,  say  a  200-pair,  running  between  terminal 
strips  in  the  basement  of  the  building  and  a  loop,  or  cross  connecting, 
underground  cable  terminal  might,  with  equal  propriety,  be  classed  as 
interior  block  wiring  and  inventoried  under  the  233  account.  It  is  the 
writer's  opinion,  however,  that  while  through  some  oversight  the  instruc- 
tions are  perhaps  a  little  loosely  worded,  it  was  not  the  intention  of  the 
commission  to  have  these  larger  cables  classed  as  block  wiring,  but  rather 
as  subsidiary  underground  cable  under  account  245. 

Questions  of  this  nature  are  constantly  arising  during  the  inventory 
period,  and  can  only  be  satisfactorily  settled  by  one  with  previous  ex- 
perience in  meeting  similar  problems. 

159.  Inventorying  the  Interior  Block  Wiring.  —  It  is  possible, 
of  course,  to  make  an  actual  inspection  of  all  of  the  interior  block  wiring, 
and  to  inventory  this  portion  of  the  plant  in  detail.    There  is  a  question, 
however,  as  to  whether  the  value  of  the  block  wire  warrants  the  expense 
involved  in  a  detailed  inventory. 

For  all  practical  purposes  sufficiently  accurate  results  may  be  obtained 
by  ascertaining  the  total  number  of  subscribers'  stations  located  within 
the  district  fed  by  the  interior  block  cables,  and  actually  inspecting  only 
a  large  enough  number  to  furnish  data  as  to  average  conditions,  —  gauge 
of  wire  used,  spacing  of  bridle  rings  on  walls,  etc.  Usually  an  inspection 
of  5  or  10  per  cent  of  the  total  number  of  stations  fed  by  interior  block 
wiring  will  suffice. 

160.  Distinction  between  Inside  Exchange  and  Toll  Plant.  —  The 
accounting  system  of  the  Interstate  Commerce  Commission  does  not 
provide  for  a  segregation  between  exchange  and  toll  of  the  elements  of 
plant  treated  in  the  preceding  chapter.    The  reason  for  this  will  be  ap- 
parent when  one  remembers  that  it  is  almost  impossible  to  allocate  such 
items  as  subscribers'  station  equipment  and  interior  wiring  to  exchange 
and  toll. 

In  a  recent  case  before  a  State  public  utilities  commission  the  counsel 
for  the  city  tried  to  force  the  telephone  company  to  segregate  that  portion 
of  its  central  office  equipment  used  for  toll  service.  The  stand  taken  by 
the  counsel  for  the  city  was  that  the  case  in  question  involved  a  readjust- 
ment of  the  telephone  rates  for  exchange  service  in  the  city,  and  that  it  was 


THE   OUTSIDE  PLANT  INVENTORY  83 

therefore  unfair  to  include  any  portion  of  the  property  used  for  toll  pur- 
poses. 

It  was  found,  however,  that  it  was  practically  impossible  to  effect  a 
separation  of  the  toll  central  office  equipment,  inasmuch  as  the  major 
portion  of  the  apparatus  used  in  any  way  for  toll  purposes  was  also  used 
for  exchange  purposes.  This  is  especially  true  in  the  case  of  small  ex- 
changes where  the  toll  board  is  really  part  and  parcel  of  the  exchange 
board,  one  or  more  positions,  perhaps,  being  set  aside  for  toll  use. 

The  Interstate  Commerce  Commission  has  furthermore  clearly  recog- 
nized the  fact  that  such  items  as  central  office  equipment  and  subscribers' 
station  equipment  cannot  be  allocated  to  the  general  exchange  and  toll 
accounts  in  that  it  has  made  no  provision  for  such  allocation  in  its  system 
of  accounts. 

161.  Outside  Toll  and  Exchange  Plant.  —  In  the  case  of  the  outside 
plant  of  a  telephone  company,  however,  conditions  are  such  that  it  is 
possible  to  effect  a  definite  separation  of  the  toll  property.  For  instance, 
certain  of  the  pole  lines  are  used  entirely  for  exchange  purposes,  and 
others  connecting  various  exchanges  are  used  exclusively  for  toll  purposes. 
Circumstances  may  arise,  however,  where  it  is  found  advantageous  to 
use  the  same  pole  line  for  both  exchange  and  toll  wires. 

In  a  case  of  this  kind  the  Interstate  Commerce  Commission  has  stipu- 
lated that  "if  plant  is  used  both  for  exchange  and  toll  service,  the  principal 
use  of  such  plant  shall  determine  its  classification."  In  other  words,  poles 
carrying  both  exchange  and  toll  wires  should  be  inventoried  as  exchange 
plant  if  the  number  of  exchange  circuits  exceeds  the  number  of  toll  cir- 
cuits, and  vice  versa. 

The  same  rule  will  apply  to  cross  arms.  With  the  possible  exception 
of  composite  cables  used  for  both  exchange  and  toll  service,  the  wire  and 
cable  plant  can  be  readily  classified  between  exchange  and  toll.  As  a 
general  rule,  wires  or  cables  that  are  used  for  exchange  purposes  are  not 
used  for  toll,  and  vice  versa. 

In  the  case  of  composite  cables,  however,  instead  of  classifying  the 
cable  as  toll  or  exchange,  according  to  principal  use,  it  is  customary  to 
pro-rate  the  total  cost  of  the  cable  to  the  corresponding  exchange  and 
toll  accounts.  A  very  satisfactory  method  of  effecting  this  separation 
is  as  follows :  — 

Assume  the  case  of  a  composite  cable  containing  200  pairs  of  No.  22- 
gauge  wire  for  exchange  purposes,  and  say  25  pairs  of  No.  13-gauge  wire 
for  toll  purposes.  Determine  the  respective  reproduction  cost  in  place 
of  the  composite  cable  and  of  a  200-pair  No.  22-gauge  cable. 

The  reproduction  cost  of  the  200-pair  No.  22-gauge  cable  may  be  taken 
as  the  portion  of  the  total  cost  to  be  allocated  to  the  exchange  cable  ac- 
count, and  the  difference  between  the  reproduction  cost  of  the  composite 


84         TELEPHONE  RATES  AND  VALUES 

cable  and  that  of  the  22  gauge  may  be  taken  as  the  amount  to  be  charged 
to  toll. 

Occasionally  circumstances  may  warrant  a  deviation  from  the  Inter- 
state Commerce  Commission's  "principal  use"  rule  in  determining  whether 
a  pole,  or  group  of  poles,  shall  be  charged  to  exchange  or  toll  accounts. 
As  an  illustration,  assume  the  case  of  a  pole  line  carrying  several  arms 
of  toll  wire  and  used  primarily  throughout  its  entire  length  for  toll  purposes. 

It  may  be  that  as  the  line  nears  the  exchange  some  of  the  poles  will 
carry  a  larger  number  of  exchange  than  toll  circuits,  due  to  the  fact  that 
they  are  used  to  facilitate  local  distribution  of  the  exchange  plant.  If 
these  poles  are  few  in  number,  and  their  use  for  exchange  purpose  is 
obviously  merely  incidental  to  their  toll  use,  they  should  still  be  classed 
as  toll  property. 

The  rules  laid  down  for  inventory  of  exchange  plant  will  apply  equally 
well  to  the  toll  plant,  but,  of  course,  great  care  should  be  taken  to  provide 
for  the  segregation  of  the  poles,  cross  arms,  etc.,  which  may  be  properly 
classed  as  exchange  from  those  which  may  be  classed  as  toll. 

162.  Pole  Lines. —  "Exchange  Account  241  should  include  the  cost 
of  poles,  towers,  cross  arms,  pins,  brackets,  braces,  guy  wire,  guy  stubs 
and  other  materials  used  in  the  construction  of  exchange-service  pole 
lines;  also  the  cost  of  first  clearing  right  of  way. 

"Toll  Account  251  should  include  the  cost  of  poles,  towers,  cross  arms, 
pins,  brackets,  braces,  guy  wire,  guy  stubs  and  other  materials  used  in  the 
construction  of  toll-service  pole  lines;  also  the  cost  of  first  clearing  right 
of  way. 

"If  plant  is  used  both  for  exchange  and  toll  service,  the  principal  use 
of  such  plant  should  determine  its  classification." 

With  the  inventory  of  the  pole  and  wire  plant  the  real  work  of  the 
appraisal  engineer  begins.  Not  that  the  elements  of  plant  considered  in 
the  foregoing  paragraphs  are  less  important,  but  their  inventory  may  be 
effected  under  more  favorable  conditions. 

The  pole  plant  is  necessarily  scattered  over  a  wide  area,  and  is  often- 
times hard  to  identify,  especially  in  localities  where  there  is  a  competing 
telephone  company  and  possibly  several  electric  light  companies,  to  say 
nothing  of  the  Western  Union  and  Postal  Telegraph  companies.  Usually 
many  of  the  poles  are  jointly  occupied  by  two  or  more  of  the  utility  com- 
panies. Then,  too,  there  is  the  weather  to  be  considered. 

To  record  the  mass  of  data  involved  in  the  pole  and  wire  plant  inventory 
neatly  and  accurately  is  a  difficult  problem  under  the  most  favorable 
weather  conditions.  But  when  hampered  by  snow  or  rain  the  ingenuity 
of  the  field  inspector  is  often  severely  taxed  to  preserve  an  orderly  record 
of  his  findings.  During  very  bad  weather  it  is,  of  course,  advisable  to 
abandon  outside  work  entirely,  and  utilize  the  men  in  the  inventory  of 
the  central  office  equipment,  stock,  tools  or  some  other  inside  work. 


THE  OUTSIDE  PLANT  INVENTORY 


85 


163.  The  Field  Map  and  Field  Form.  —  As  to  the  actual  method 
employed  in  the  inventory  of  the  pole  plant  of  a  telephone  company, 
maps  suitable  for  field  work  —  preferably  blue  line  prints  of  a  scale  of 
about  500  or  600  feet  to  the  inch  —  should  be  secured.  If  the  company  in 
question  has  a  reliable  pole  record,  pole  locations  should  be  plotted  on  the 
map.  If  no  records  are  available,  or  if  the  existing  records  prove  unre- 
liable, the  field  maps  should  be  checked  over  by  some  employee  familiar 
with  the  location  of  the  plant  and  pole  line  streets  indicated  in  pencil 
on  the  map. 

The  field  maps  should  be  divided  into  sections  of  convenient  size,  each 
containing  approximately  the  same  number  of  poles.  A  form,  somewhat 
of  the  type  shown  in  Fig.  13,  should  be  provided  for  the  recording  of  the 


fffJ.0  NOTES  fO/f 


ffAJ&H  Of  TH£  . 


I 


FIG.  13.  —  Example  of  form  used  for  the  recording  of  field  inventory  data. 


data.  This  form,  it  will  be  noted,  provides  for  the  inventory  not  only  of 
the  poles  but  of  the  auxiliary  equipment,  such  as  cross  arms,  anchors, 
guys,  etc.,  and  of  all  the  wire  and  cable  attachments. 

The  notation  of  the  cable  equipment,  however,  is  merely  for  the  purpose 
of  checking  a  separate  inventory  of  the  cable  plant,  and  may  be  omitted 
entirely  from  the  form  if  desired.  This  matter  will  be  discussed  more  in 
detail  under  the  heading,  "  Aerial  Cable." 

Before  distribution  to  the  field  inspectors,  each  field  map  should  be 
assigned  an  identification  number,  this  number  to  be  noted  by  the  inspector 
in  the  space  provided  therefor  in  the  upper  left-hand  corner  of  the  data 
sheet. 

164.  Instructions  for  using  Field  Maps  and  Data  Sheets.  — 
The  following  instructions  may  be  found  helpful  in  understanding  the 
relation  between  the  data  sheet,  Fig.  13,  and  the  field  map,  Fig.  14. 

1.  Spot  poles  on  the  field  map,  Fig.  14,  locating  each  as  accurately  as 
possible  in  relation  to  street  and  alley  intersections.  Spot  only  those 
poles  belonging  to  other  companies  with  which  the  wires  of  the  telephone 
company  make  contact.  If  poles  are  already  shown  on  the  map,  check 


86 


TELEPHONE  RATES  AND  VALUES 


locations  making  corrections  where  necessary.  Before  leaving  any  block, 
check  back  to  make  certain  that  the  number  of  poles  spotted  in  the  block  is 
correct. 

2.  Number  the  poles  consecutively  as  they  are  spotted  or  checked, 
beginning  the  series  with  "  1"  on  each  map. 


GUY 


100 


c*» 


/6  f  (30 


f 


13        /•*        IS 


-2 2 1 


FIG.  14.  —  Portion  of  a  field  map  showing  method  of  use. 

3.  Use  a  separate  line  on  the  data  sheet  for  each  pole  spotted  on  the 
map,  whether  the  pole  is  owned  by  the  telephone  company  or  by  others, 
checking  the  corresponding  ownership  column  on  the  data  sheet.     List 
only  the  wires  and  equipment  owned  by  the  telephone  company,  ignoring 
wires  and  equipment  owned  by  others. 

4.  In  the  columns  marked  "Kind,"  use  the  letter  C  for  cedar,  Ch  for 
chestnut  and  T  for  tamarack,  etc. 


F/ELD  HOTZ5  FOR  AS>f"/f/U3Ai  Of  TM£ 


5.  In  the  column  marked  "Setting,"  use  D  for  dirt,  R  for  rock,  P  for 
pavement  and  C  for  concrete  reinforcement. 

6.  In  the  column  marked  "Tree  Trimming,"  use  L  for  light  trimming, 
H  for  heavy  trimming,  M  for  medium  trimming  and  C  for  trees  cut  down. 

7.  Anchors  should  be  divided  into  two  general  classifications,  —  long 
anchors  and  patent  anchors.    Each  of  these  should  be  again  subdivided 


THE  OUTSIDE  PLANT  INVENTORY  87 

into  heavy,  medium  and  light  anchors,  as  indicated  on  data  sheet  (Fig. 
13).  Just  what  shall  constitute  a  heavy,  medium  or  light  anchor  should 
be  decided  by  the  appraisal  engineer  prior  to  the  beginning  of  field  work, 
and  definite  instructions  issued  to  the  field  force. 

8.  Under  the  column  marked  "Cable  Plant "  merely  indicate  the  number 
of  cables,  terminals,  pole  seats,  etc.,  without  regard  to  size  or  kind. 

9.  Under  the  column  marked  "  Condition,"  use  E  for  excellent,  G  for 
good,  F  for  fair  and  P  for  poor. 

10.  Place  name  and  date  on  each  section  of  field  map  and  on  each 
inventory  sheet.    Where  more  than  one  sheet  is  used  in  connection  with 
one  field  map,  sheets  should  be  numbered  consecutively. 

11.  Where  pole  lines  extend  beyond  the  limit  of  the  map,  mark  the 
last  pole  taken  with  red  chalk.    An  arrowhead  inside  a  circle  should  be 
used  for  this  designation  mark. 

The  method  of  determining  the  condition  of  the  poles,  cross  arms  and 
auxiliary  equipment  will  be  discussed  in  detail  in  a  subsequent  installment 
under  the  general  subject  of  condition  of  outside  plant. 

165.  Exchange  Aerial  Wire,  Account  243.  —  "This  account  should 
include  the  cost  of  exchange  service  wires,  including  insulators,  sleeves 
and  other  materials  used  in  attaching  such  wires  to  the  insulators.    The 
exchange  wire  includes  the  drop  wire  leading  from  the  overhead  plant 
to  the  point  of  entrance  to  the  building." 

166.  Toll  Aerial  Wire,  Account  253.  —  "This  account  should  include 
the  cost  of  toll  service  wires,  including  insulators,  sleeves  and  other  ma- 
terials used  in  attaching  such  wires  to  the  insulators." 

167.  Inventory  of  the  Aerial  Wire.  — As  already  explained,  the 
inventory  of  the  aerial  wire  will  be  made  in  conjunction  with  that  of  the 
pole  and  pole  equipment,  and  the  data  recorded  on  the  same  sheets. 

In  order  to  avoid  confusion  and  possible  duplication  of  the  wire  inven- 
tory, a  definite  plan  should  be  adopted  in  recording  the  number  of  wires 
found  between  each  pair  of  poles.  One  way  of  doing  this  is  to  always 
associate  the  wire  between  two  goles  with  the  pole  bearing  the  highest 
number,  viz.,  wires  between  poles  Nos.  7  and  8  should  be  recorded  on 
the  same  line  as  pole  No.  8. ;  wire  between  poles  Nos.  8  and  9  should  be 
associated  with  pole  No.  9,  etc. 

In  carrying  out  this  plan  it  will  sometimes  happen  that  an  extra  span 
of  wire  is  encountered.  For  instance,  suppose  in  inventorying  pole  lines 
(Fig.  14)  marked  13  to  15  and  16  to  18,  respectively,  it  was  found  that 
both  of  these  lines  continued  farther  than  indicated  in  the  sketch.  JM 

The  inspector,  in  covering  these  lines,  would  probably  find  it  to  his 
advantage  to  continue  west  and  north  from  pole  No.  15,  and  subsequently 
cover  poles  Nos.  18,  17  and  16  on  his  return  trip  southward.  In  this 
case  the  latter  poles  would  be  assigned  higher  numbers,  say  29,  30  and 
31,  the  pole  marked  No.  16  becoming  pole  No.  31. 


88 


TELEPHONE  RATES  AND  VALUES 


The  wire  between  poles  Nos.  12  and  13  would,  of  course,  be  inventoried 
in  connection  with  pole  No.  13,  and  the  wires  between  poles  Nos.  30  and 
31  in  connection  with  pole  No.  31.  There  still  remains,  however,  the  wire 
between  poles  Nos.  31  and  12,  and  between  poles  Nos.  31  and  13. 

In  cases  of  this  kind  the  data  for  these  extra  spans  of  wire  should  be 
recorded  (Fig.  13)  on  the  two  lines  immediately  following  the  line  used 
for  pole  No.  31,  with  notations  in  the  margin:  "wire  between  poles  Nos. 
31  and  12,"  and,  "wire  between  poles  Nos.  31  and  13."  The  columns  for 
pole  and  cross-arm  data  will,  of  course,  be  left  blank. 

Having  carefully  inventoried  the  number  of  wires  of  each  type  between 
each  set  of  poles,  there  remains  but  to  determine  the  distances  between 
poles  to  ascertain  the  amounts  of  wire  involved.  Obviously  it  is  out  of 
the  question  to  measure  the  distance  between  each  set  of  poles.  Repre- 
sentative measurements  should,  however,  be  taken  at  frequent  intervals 
and  recorded  so  that  an  average  span  length  may  be  computed  for  each 
map  section.  This  span  length  multiplied  by  the  total  number  of  spans 
of  wire  will  give  the  quantity  of  wire. 

168.  Segregation   of   Toll   from   Exchange    Plant. —  Fig.  13  is 
adapted  for  use  in  inventorying  both  exchange  and  toll  plant  within  the 
local  service  area.    The  segregation  may  be  effected  by  the  use  of  separate 
sheets  in  the  field  for  exchange  and  toll,  or,  if  the  amount  of  toll  plant 
involved  is  comparatively  small,  it  may  be  recorded  on  the  exchange  sheet 
and  subsequently  taken  off  on  separate  summaries  in  the  office. 

If  this  latter  plan  is  followed  great  care  should  be  taken  to  plainly  mark 
toll  data  so  as  to  distinguish  it  from  exchange  data. 

169.  Rural  Pole  and  Wire  Plant.  —  It  is  obviously  out  of  the  question 
to  inventory  the  rural  plant  with  the  same  attention  to  detail  as  must 


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FIG.  15.  —  Sheet  used  to  record  pole  and  wire  data  of  rural  lines. 

necessarily  be  observed  in  the  appraisement  of  the  city  plant.  An  exchange 
having  2,000  city  poles  may  have  50,000  rural  poles.  Fortunately  the 
rural  plant  is  usually  of  nearly  uniform  construction,  so  that  the  inventory 
can  be  made  at  a  fairly  rapid  rate  without  materially  affecting  its  accuracy. 
A  sheet  somewhat  of  the  type  of  Fig.  15  should  be  used  for  recording 


THE  OUTSIDE  PLANT  INVENTORY 


89 


the  rural  pole  and  wire  data.  County  maps,  or  United  States  topographical 
survey  maps,  may  be  used  as  a  guide  in  locating  the  property,  and  runs  of 
poles  —  sometimes  a  mile  or  two  in  length  —  may  be  recorded  at  one  time. 

A  farm  line  built  of  poles  of  the  

same  type  and  size,  say  25  or  30  feet, 
may  carry  two  arms  of  wire  for  the 
first  mile  or  two  out  of  town,  one  arm 
for  the  next  mile  or  two,  and  perhaps 
two  or  three  circuits  on  brackets  for 
the  remainder  of  its  length.  By 
placing  the  numeral  1  at  the  point 
where  the  line  leaves  the  city  limits, 
the  numeral  2  where  the  first  arm 
drops  off,  the  numeral  3  where  the 
bracket  lead  begins,  and  the  numeral 
4  at  the  end  of  the  line,  the  equip- 
ment for  this  whole  pole  line  may 
be  recorded  on  three  lines  of  the 
data  sheet. 

In  inventorying  the  rural  plant 
it  will  be  found  advantageous  to 
make  use  of  several  pole  counters, 
one  for  counting  poles  of  one  size, 
a  second  for  counting  another  size, 
and  a  third  for  counting  the  total 
number  of  cross  arms,  etc.  The 
lengths  of  wire  can  usually  be  ob- 
tained with  sufficient  accuracy  by 
scaling  the  county  maps,  but  it  is 
a  good  plan,  if  the  lines  are  covered 
by  automobile,  to  make  frequent 
checks  with  the  aid  of  the  tachom- 
eter. 

170.  Aerial  Cable,  Exchange 
Account  242  and  Toll  Account 
252.  —  "  These  accounts  should  in- 
clude the  cost  of  cables,  including 
the  cost  of  suspension  wire,  cable 
clips  and  rings,  cable  boxes  and 

fittings,  pole  seats  and  platforms,?  loading  coils,  potheads,  protectors, 
sleeves  and  other  material  used  in  hanging  such  cables." 

Before  beginning  the  inventory  of  the  aerial  cable  plant  all  of  the  avail- 
able data  as  to  location,  size  and  gauge  of  cables,  size  of  terminals,  etc., 
should  be  reviewed.  If  these  data  have  not  already  been  assembled  in 


.2 


90         TELEPHONE  RATES  AND  VALUES 

map  form,  maps  should  be  made  showing,  at  least,  the  size  and  gauge 
of  cables  and  the  location  of  terminals.  A  form  somewhat  of  the  type 
of  Fig.  16  may  be  used  for  recording  the  aerial  cable  data. 

It  has  been  the  writer's  experience  that  the  inventory  of  the  aerial 
cable  plant  may  be  considerably  expedited  by  recording  all  of  the  data 
directly  on  the  field  maps,  and  using  Fig.  16  as  a  summary  or  interme- 
diate transfer  sheet.  If  this  latter  plan  is  adopted,  all  of  the  data 
called  for  on  the  form  should  be  neatly  recorded  by  the  field  in- 
spector on  the  map,  and  transferred  to  the  form  sheet  at  the  close  of 
each  day's  work  before  the  notations  become  indistinct. 

If  there  is  the  slightest  doubt  as  to  the  size  or  gauge  of  cables,  the 
diameter  of  all  cables  should  be  carefully  measured  in  the  field,  and 
measurements  recorded  for  subsequent  check  with  manufacturers' 
records.  It  will  usually  be  found  that  the  diameters  of  cables  of  a 
given  make,  size,  gauge  and  capacity  are  practically  constant.  This 
rule  for  determining  the  size  of  cables,  however^  is  not  infallible,  and 
a  very  careful  check  of  all  available  office  records  as  to  number  of  pairs 
terminated,  etc.,  should  be  made  where  there  is  any  doubt  as  to  size  or 
gauge  of  cable. 

171.  Points  to  be  noted  by  Field  Inspectors  of  the  Aerial  Cable 
Plant.  —  The  following  points  should  be  noted  by  the  field  inspectors 
in  the  inventory  of  the  aerial  cable  plant :  — 

1.  Size  (number  of  pairs),  gauge  and  length  of  each  cable.     The  length  should 
be  determined  by  actual  measurement  with  a  surveyor's  chain.    It  is  usually  best 
to  record  the  length  between  each  pair  of  terminals. 

2.  Diameter,  tensile  strength  and  material  of  messenger  strands. 

3.  Type  and  size  of  cable  hangers;    note  specifically  whether  the  marlin,  ring 
or  Metropolitan  type  of  hanger  is  used. 

4.  Type  and  size  of  terminals,  and  whether  protected  or  unprotected.     If  pro- 
tected, note  the  number  of  pairs  equipped  with  protectors. 

5.  Condition  of  cable,  strands  and  terminals. 

172.  Underground  Conduits,  Exchange  Account  244  and  Toll 
Account  254.  — •  "This  account  should  include  the  cost  of  service  con- 
duits, including  the  cost  of  pipe,  cement,  handholes,  manhole  furnishings 
and  other  materials  used,  the  cost  of  connections  to  poles  and  buildings, 
repaving  and  other  costs  incident  to  the  installation  of  such  conduits." 

The  inventory  of  the  underground  plant  for  a  small  exchange  is  usually 
a  comparatively  simple  problem.  In  all  probability  the  subway  will  be 
found  to  extend  only  a  few  blocks  from  the  office,  the  cables  few  in  num- 
ber, and  the  manholes  readily  accessible  for  inventory  purposes.  When 
it  comes  to  the  underground  plant  feeding  the  congested  section  of  a 
large  city,  however,  the  problem  becomes  more  complicated,  and  unless 
the  utmost  care  is  observed  in  the  taking  and  recording  of  the  data,  the 
inventory  will  result  in  a  hopeless  tangle. 


THE  OUTSIDE  PLANT  INVENTORY 


91 


173.  First  Requisites  for  inventorying  the  Conduit  System.  — 

The  first  requisite  for  the  inventory  of  the  conduit  system  is  a  skeleton 
map  showing  the  location  of  conduit,  manholes,  and,  if  the  records  afford 
the  necessary  information,  of  all  lateral  conduit  to  poles  and  buildings. 
Most  companies  have  maps  of  this  character  on  file.  If  the  manholes  are 
not  already  identified  by  number  or  letter,  they  should  be  numbered 
serially,  beginning  with  the  manhole  nearest  the  office.  A  skeleton  map 
of  the  form  described  is  shown  in  Fig.  17. 

A  form  of  the  general  character  of  Fig.  18  should  be  provided  for 
recording  the  conduit,  manhole  and  underground  cable  data.     In  the 


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FIG.  17.  —  Skeleton  map  for  the  inventory  of  conduit  systems. 

upper  right-hand  corner  a  manhole  diagram  is  provided,  the  four  walls 
of  the  manhole  being  folded  down  to  the  plane  of  the  floor.  In  using  this 
form  the  inspector  should  always  associate  with  each  manhole  the  section 
of  conduit  between  that  manhole  and  the  next  manhole  toward  the  central 
office. 

174.  Preliminary  Work  of  inventorying  Conduit  System.  —  To 
facilitate  a  clearer  understanding  of  the  method  herein  suggested  for 
inventorying  the  underground  plant,  the  various  steps  taken  by  the 
inspector  in  inventorying  a  typical  manhole  —  say  No.  2,  Fig.  17  —  will 
be  briefly  considered.  Assuming  that  he  has  just  completed  a  record  of 
manhole  No.  1,  the  inspector  will  first  note  the  location  of  the  subway,  the 
central  office  district  and  the  manhole  number  on  a  fresh  sheet,  in  the 
spaces  provided  therefor  at  the  top  of  the  form. 

He  will  next  measure  the  distance  (using  a  100-foot  steel  tape)  between 
the  center  of  the  cover  of  manhole  No.  1  and  the  center  of  the  cover  of 
manhole  No.  2.  This  measurement,  310  feet  in  the  present  case,  will  be 
recorded  in  a  convenient  place  for  subsequent  use  in  determining  the 
duct  length  between  manholes  Nos.  1  and  2.  En  route  from  manhole 
No.  1  to  manhole  No.  2  the  inspector  will  carefully  watch  for  changes 


92 


TELEPHONE  RATES  AND  VALUES 


0.  0.  CABLE  AHD   3UBWAT  RBCORP 


STREET   LET. 


uanhola  No. 


CONDUIT 
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Paving  bstwaan  manhole 
oavlng  around  maaholaa 


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FIG.  18.  —  Sheet  for  recording  conduit,  manhole  and  underground  cable  data. 


THE  OUTSIDE  PLANT  INVENTORY  93 

in  the  character  of  the  pavement,  and,  if  several  varieties  of  paving  are 
found,  he  will  keep  accurate  memoranda  of  the  lengths  involved. 

The  importance  of  accurate  measurements  of  the  subway  plant  will 
be  readily  appreciated  when  it  is  realized  that  the  cost  of  the  main  con- 
duit may  run  as  high  as  $5  per  lineal  foot  of  trench,  and  the  cost  of  pave- 
ment as  high  as  $1  per  lineal  foot. 

Unless  surveyor's  pins  are  used  in  measuring,  it  is  a  very  easy  matter 
to  make  an  error  of  100  or  more  feet  in  measuring  long  manhole  sections. 
As  a  precaution,  both  the  inspector  and  his  helper  should  keep  track  of 
the  measurements,  —  even  when  pins  are  used,  —  comparing  notes  before 
the  lengths  are  finally  recorded. 

Arriving  at  manhole  No.  2,  the  inspector  will  record  the  measurements 
and  pavement  data,  and  make  a  rapid  survey  of  any  data  he  may  have 
at  hand  as  to  the  conditions  he  is  likely  to  encounter  in  the  manhole 
about  to  be  inventoried.  This  preliminary  work  may  be  done  while  the 
assistant  is  opening  the  manhole,  in  some  cases  rather  a  lengthy  task. 

175.  Necessity  of  System  in  Inventorying.  —  A  word  here  as  to 
the  necessity  of  carrying  out  the  work  of  inventorying  the  underground 
plant  in  a  systematic  manner.    The  value  of  the  plant  involved,  and  the 
fact  that  it  is  usually  rather  complicated,  necessitates  the  employment 
of  higher-priced  men  on  this  portion  of  the  inventory  than  is  usually 
necessary  in  the  case  of  the  aerial  plant.    Hence  the  importance  of  the 
utmost  efficiency  to  keep  down  appraisal  costs. 

A  thoroughly  experienced  inspector,  by  making  every  move  count, 
can  accurately  inventory  from  50  to  75  manholes  in  an  eight-hour  day, 
whereas  a  novice  probably  could  not  cover  15  manholes  in  the  same  length 
of  time.  In  cold  weather,  when  the  manhole  covers  are  frozen,  or  if  the 
covers  are  hard  to  open  for  any  other  reason,  it  will  be  found  advantageous 
to  send  along  an  extra  man,  who  can  devote  himself  exclusively  to  the 
work  of  opening  and  preparing  the  manholes  for  inventory  while  the 
inspector  and  helper  are  checking  up  lateral  measurements.  In  this  way 
lost  time  may  be  minimized. 

176.  Safeguarding  the  Manhole.  —  As  soon  as  the  manhole  is 
open,  the  inspector  will  enter,  leaving  his  helper  on  guard  outside.    Pre- 
cautionary measures  for  safeguarding  the  man  in  the  hole  are  most  im- 
portant. 

Many  municipalities  have  strict  ordinances  as  to  the  opening  of  man- 
holes. Some  cities  require  that  open  manholes  be  temporarily  covered 
with  a  heavy  metal  screen;  others  that  the  man  on  guard  carry  a  red 
flag,  while  still  others  stipulate  the  guarding  of  open  manholes  with  a 
portable  gas  pipe  railing.  The  existence  of  such  ordinances  should  be 
carefully  checked  by  the  appraisal  engineer  before  the  men  are  sent  into 
the  field. 


94         TELEPHONE  RATES  AND  VALUES 

177.  Taking  and  Recording  Data.  —  In  some  instances  it  will  be 
found  that  manholes  are  so  dirty  as  to  render  the  recording  of  the  data 
by  the  man  in  the  hole  practically  out  of  the  question.    In  cases  of  this 
kind  the  inspector  should  call  off  the  data  for  his  helper  to  record,  always 
having  the  helper  call  back  the  measurements,  or  descriptive  data,  as  he 
records  them.    If  this  plan  is  adopted,  the  data  should  always  be  taken 
in  the  same  order,  to  obviate  confusion  in  recording. 

With  the  aid  of  a  small  tape  line,  or  flexible  6-foot  extension  rule,  the 
inspector  will  take  the  dimensions  of  the  manhole,  —  length,  breadth 
and  depth  from  the  street  level  to  the  floor,  —  and  these  measurements 
will  be  recorded  in  the  spaces  provided  therefor  on  the  diagram  (Fig.  18). 
If  the  manhole  is  found  to  be  irregular  in  shape,  a  separate  sketch  should 
be  made  giving  sufficient  information  to  enable  the  unit  cost  man  in  the 
office  to  gain  a  reasonably  accurate  idea  of  the  conditions  encountered. 

Assuming  that  the  covers  on  both  manholes  Nos.  1  and  2  are  located  in 
the  center  of  the  holes,  longitudinally,  one-half  of  the  sum  of  the  combined 
lengths  of  the  manholes,  deducted  from  the  center  to  center  measurement, 
will  give  the  conduit  length,  which  should  be  recorded  in  the  space  pro- 
vided (Fig.  18),  under  the  heading  "Conduit." 

The  inspector  will  next  indicate  on  the  form  the  arrangement  of  the 
ducts  entering  the  hole,  in  the  spaces  provided  therefor  on  the  manhole 
diagram.  The  size  and  material  of  the  conduit  between  manhole  No.  1 
and  manhole  No.  2  will  then  be  recorded  as  indicated.  Conduit  entering 
the  manhole  from  the  east  and  south  should  be  noted  on  the  diagram, 
though  of  course  the  actual  inventory  will  be  effected  in  connection  with 
manholes  Nos.  3  and  5,  respectively. 

A  cross  through  the  diagram  of  the  northerly  wall  indicates  that  no 
ducts  enter  the  manhole  from  this  direction.  The  approximate  location 
of  lateral  ducts  will  be  noted  —  as  at  A  and  B  —  and  the  description  of 
the  manhole  recorded  as  indicated  on  Fig.  18  under  the  heading  "Man- 
hole." 

178.  Underground  Exchange  Cable,  Account  245.  —  "This  account 
should  include  the  cost  of  exchange  service  underground  cables,  including 
cable  boxes  and  fittings,  loading  coils,  and  other  materials  used  in  the  work 
of  installing  such  cables,  and  other  costs  incident  thereto. 

"It  should  include,  in  addition  to  the  main  exchange  underground 
cable,  the  subsidiary  cables  through  laterals  to  pole  for  building  terminals; 
the  subsidiary  cables  to  the  interior  of  city  blocks  for  connection  with 
interior  block  wires;  and  the  subsidiary  cables  entering  vertically — as 
house  cables  —  into  buildings  for  connection  there  with  the  inside  wires. 

"House  cables  are  considered  to  be  vertical  extensions  of  underground 
cables  or  plant  similar  thereto.  They  do  not  include  the  inside  wires 
extending  from  terminal  boxes  of  house  cables  to  subscribers'  stations, 


THE  OUTSIDE  PLANT  INVENTORY  95 

nor  the  cables  for  subscribers'  private  branch  exchange  switchboards, 
which  are  included  in  Account  232,  Station  Installations." 

179.  Underground   Toll   Cable,    Account    255. —  "This   account 
should  include  the  cost  of  toll  service  underground  cables,  including 
cable  boxes  and  fittings,  loading  coils,  and  other  materials  used  in  the 
work  of  installing  such  cables,  and  other  costs  incident  thereto." 

180.  Classes  of  Exchange  Underground  Cable.  —  The  exchange 
underground  cable  may  be  divided  into  the  following  four  classes :  — 

Main  Cable :  The  cable  in  main  conduit. 

Lateral  Cable:  The  cable  in  lateral  conduit. 

Block  Cable:  The  cable  along  rear  building  walls,  or  fences,  within 
city  blocks. 

House  Cable:  Cable  used  for  local  distribution  in  large  buildings,  such 
as  hotels  and  office  buildings. 

The  inventory  of  the  main  cable  and  lateral  cable  is  provided  for  on  Fig. 
18.  Block  and  house  cables  will  be  inventoried  separately  in  accordance 
with  the  plan  outlined  in  a  subsequent  portion  of  this  chapter. 

181.  Measurements   of    Underground    Cable    Lengths.  —  After 
completing  the  manhole  data,  the  inspector  will  measure  the  cable  length 
from  the  point  of  entrance  of  the  cable  on  the  westerly  manhole  wall  to 
the  center  of  the  splice  on  the  northerly  manhole  wall.    This  measure- 
ment, together  with  the  corresponding  measurement  in  manhole  No.  1, 
when  added  to  the  length  of  cable  in  conduit,  305  feet,  will  give  the  main 
cable  length  between  manholes  Nos.  1  and  2,  —  a  total  of  312  feet. 

This  length,  together  with  the  data  as  to  gauge,  size,  diameter  and 
condition  of  the  cable,  will  be  noted  in  the  space  provided  therefor,  under 
the  heading  "Main  Cable."  The  diameter  may  be  determined  either 
by  the  use  of  calipers  or  with  a  strap  diameter  gauge.  A  small  tape,  or  a 
flexible  6-foot  extension  rule,  may  be  used  for  measuring  cable  lengths. 

Other  cable  measurements  in  the  manhole  should  be  taken  as  indicated 
on  the  diagram  (Fig.  18)  for  subsequent  use  in  determining  the  cable 
lengths  to  manhole  No.  3,  manhole  No.  5  and  lateral  A,  respectively. 

182.  Materials  of  Lateral  Conduits.  —  There  still  remains  the  in- 
ventory of  laterals  A  and  B  and  of  the  lateral  cable  in  duct  A.    The  ma- 
terial of  the  laterals  may  be  determined  by  inspection  at  the  point  where 
they  enter  the  manhole  wall.     A  small  electrical  flashlight  will  prove  a 
material  aid  in  exploring  the  dark  recesses  of  handholes,  where  the  laterals 
are  usually  to  be  found. 

The  laterals  may  be  composed  of  any  one  of  seven  different  materials,  — 
iron  pipe,  creosoted  wood  duct,  fiber  duct,  paper  duct,  American  stone 
duct  (concrete),  vitrified  clay  duct  or  sewer  tile.  These  materials  repre- 
sent a  rather  wide  range  of  costs,  and  the  importance  of  accurately  de- 
termining the  duct  material  used  in  lateral  construction  will  be  obvious. 


96         TELEPHONE  RATES  AND  VALUES 

Often  the  point  of  entrance  of  the  lateral  ducts  to  the  manhole  will  be 
found  covered  with  mud,  or  partially  obscured  by  mortar,  rendering  a 
view  of  the  duct  material  exceedingly  difficult,  even  with  the  aid  of  a 
pocket  flashlight.  One  familiar  with  the  various  duct  materials  can 
readily  identify  them  by  sense  of  touch.  Iron  pipe  is,  of  course,  very 
hard,  and  usually  rather  smooth  to  the  touch. 

Creosoted  wood  is  comparatively  soft,  and  the  fibrous  nature  of  the 
wood  can  readily  be  distinguished  with  the  bare  hand.  Fiber  and  paper 
duct  look  and  feel  very  much  alike,  but  if  a  small  piece  is  broken  off  or  cut 
away  with  a  knife,  and  the  cross  section  carefully  examined,  it  will  be 
found  that  the  fiber  presents  a  homogenous  appearance,  while  the  paper 
can  be  easily  separated  into  annular  rings  or  layers. 

American  stone  duct  has  the  familiar  feeling  of  stone  on  concrete. 
Vitrified  clay  presents  a  smooth  and  glassy  interior  surface.  Sewer  tile 
lacks  the  glazed  finish  of  the  vitrified  clay,  and,  while  rough  to  the  touch, 
is  smoother  grained  than  the  American  stone  duct. 

Before  leaving  the  manhole  the  inspector  will  make  a  notation  of  the 
material  and  diameter  of  both  laterals  A  and  B,  in  the  column  headed 
"Material,"  under  the  general  classification,  "Laterals"  (Fig.  18).  The 
size,  gauge  and  diameter  of  lateral  cable  A  may  be  determined  either 
within  the  manhole  or  at  the  pole.  As  a  safeguard,  it  is  better  to  take 
this  data  at  both  locations. 

183.  Main  Conduit  and  Lateral  Conduit  Lengths. —  The  de- 
termination of  the  length  of  lateral  ducts  and  cables  comes  next.  This 
is  not  always  as  simple  a  problem  as  it  may  at  first  appear.  The  course 
of  the  main  conduit  between  two  manholes  is  nearly  always  readily  deter- 
minable. 

In  the  first  place,  conduit  between  two  manholes  is  always  laid  as 
nearly  in  a  straight  line  as  possible.  If  subsurface  obstructions  are  en- 
countered in  the  course  of  construction,  necessitating  a  sharp  bend,  an 
intermediate  manhole  will  usually  be  found  at  the  bend.  In  the  second 
place,  if  the  conduit  was  laid  subsequent  to  paving,  the  line  of  the  trench 
can  usually  be  traced  on  the  surface  of  the  pavement. 

When  it  comes  to  the  laterals,  however,  the  conditions  are  entirely 
different.  The  lateral  poles  may  be  so  located  as  to  necessitate  the  follow- 
ing of  a  circuitous  route  in  laying  the  conduit  between  manhole  and  pole, 
and  a  large  proportion  of  the  total  length  of  the  lateral  may  be  under  a 
dirt  or  sod  surface,  so  that  it  is  well-nigh  impossible  to  locate  the  trench 
by  external  appearances.  Then,  again,  city  ordinances  may  have  restricted 
the  location  of  the  trench. 

In  some  cities  telephone  companies  are  compelled  by  ordinance  to  lay 
all  conduit  either  parallel  or  at  right  angles  to  curb  lines.  This  question 
of  ordinance  can,  of  course,  be  readily  checked  by  the  appraisal  engineer, 


THE  OUTSIDE  PLANT  INVENTORY 


97 


and  the  inspector  can  often  determine  the  general  direction  of  a  lateral 
from  the  angle  at  which  it  leaves  the  manhole  wall.  With  these  aids,  one 
familiar  with  underground  construction  methods  can  usually  determine 
a  lateral  course  with  sufficient  accuracy  for  ordinary  purposes. 

184.  Method  of  Measuring  Lateral  Conduits.  —  The  method  of 
measuring  laterals  is  illustrated  in  Fig.  19.  The  lateral  duct  measurement 
should  be  taken  from  a  point  on  the  pavement  directly  over  the  manhole 
wall  to  a  point  on  the  pavement  immediately  over  the  junction  of  the 
lateral  conduit  and  riser-bend.  The  first  point  may  be  determined  by 
measuring  the  distance,  inside  the  manhole,  from  the  edge  of  the  hole 


FIG.  19.  —  Illustration  of  method  of  measuring  laterals. 

cover  to  the  wall,  and  subsequently  laying  off  this  measurement  on  the 
surface,  marking  the  location  of  the  manhole  wall  with  a  chalk  line  on  the 
pavement. 

The  point  of  junction  between  the  conduit  and  the  riser-bend  is  usually 
readily  determinable.  Riser-bends  come  in  standard  lengths  and  bends 
for  a  given  size  of  pipe  and  have  a  standard  radius.  A  riser-bend  3  inches 
in  diameter  is  generally  90  degrees  (quarter  circle),  bent  on  a  3-foot 
radius,  and  has  a  total  length  of  approximately  5  feet.  The  distance 
from  the  pole  to  the  junction,  then,  will  equal  the  radius  of  the  bend,  —  3 
feet  in  this  case.  Lateral  B  entering  a  building  will,  of  course,  have  no 
riser,  and  the  lateral  measurement  will  be  taken  to  the  building  wall. 

185.  Determination  of  Length  of  Lateral  Cables.  —  Having 
recorded  the  measurements,  paving  data  and  the  description  of  riser,  — 
in  this  case  (Fig.  19)  a  15-foot,  3-inch  iron  pipe  riser  made  up  of  a  10-foot 
standpipe  and  a  5-foot  bend,  —  the  inspector  will  next  determine  the 
length  of  the  lateral  cable. 


98         TELEPHONE  RATES  AND  VALUES 

Lateral  cables  usually  terminate  in  a  loop  (cross-connection)  box,  or 
are  spliced  directly  to  the  aerial  cable  at  the  underground  pole.  In  cases 
of  this  kind  the  lateral  cable  length  will  be  the  total  distance  from  the 
manhole  splice  to  the  splice  at  the  underground  pole  (pothead  splice  to 
loop  box  or  aerial  cable  splice,  as  the  case  may  be) . 

Occasionally  it  will  be  found  that  the  lateral  cable  extends  without  a 
splice  to  the  second  or  third  pole  from  the  manhole.  In  this  event  the 
lateral  cable  will  be  considered  as  terminating  at  the  point  where  the 
cable  is  attached  to  the  messenger  strand,  and  all  cable  beyond  this  point 
will  be  inventoried  as  aerial  cable. 

The  length  of  cable  from  the  top  of  the  riser  to  the  splice  —  or  to 
the  aerial  cable  strand,  if  there  is  no  splice  —  can  usually  be  determined 
quite  accurately  by  counting  the  number  of  pole  steps,  providing,  of 
course,  that  the  steps  are  placed  in  accordance  with  standard  specifica- 
tions on  a  3-foot  center. 

In  the  case  under  consideration  (Fig.  19),  the  total  lateral  cable  length 
is  as  follows :  2  feet  in  manhole  +  150  feet  in  lateral  ducts  +  15  feet  in 
riser  +  10  feet  on  pole,  —  a  total  of  177  feet. 

186.  Inventory    of    Underground    Terminal    Equipment.  —  In 
inventorying  the  underground  terminal  equipment,  the  inspector  should 
note  the  make  and  manufacturers'  code  number  of  the  terminal,  the 
ultimate  pair  capacity,  the  present  pair  equipment,  whether  the  terminal 
is  protected  or  unprotected,  and  the  size  and  make  of  the  pole  seat. 

In  this  connection  it  may  be  said  that  a  terminal  located  on  the  under- 
ground pole  is  considered  a  part  of  the  underground  cable  plant  only  when 
the  lateral  cable  actually  ends  in  the  terminal.  A  terminal  tapped  off 
from  a  splice  between  underground  and  aerial  cables  is  considered  as  part 
of  the  aerial  cable  equipment,  and,  together  with  its  pole  seat,  should 
be  so  inventoried. 

187.  Determination  of  Size  and  Gauge  of  Underground  Cable.  - 
As  in  the  case  of  the  aerial  cable,  the  determination  of  the  size  and  gauge 
of  the  underground  cable  is  necessarily  a  difficult  problem.    It  is  obviously 
out  of  the  question  to  open  working  cables  for  the  purpose  of  counting 
pairs  or  determining  wire  gauges.    However,  given  the  make  of  the  cable 
and  its  capacity,  it  is  possible  to  make  a  reasonably  accurate  guess  as  to 
the  size  and  gauge  by  ascertaining  the  diameter. 

The  importance  of  checking  results  so  obtained  by  every  other  possible 
means  cannot  be  exaggerated.  The  appraisal  engineer  should  review  the 
invoices  in  an  effort  to  determine  the  size  and  gauge  of  all  cable  purchased 
during  the  various  installation  periods.  He  should  also  thoroughly 
investigate  all  available  cable  records  and  compare  them  with  the  results 
obtained  in  the  field.  A  still  further  check  may  be  effected  by  totaling  up 
the  pairs  terminated  in  each  cable,  and,  after  making  allowances  for 


THE  OUTSIDE  PLANT  INVENTORY  99 

multiple  repairs  and  for  unterminated  pairs,  comparing  the  sizes  ascer- 
tained in  this  way  with  those  derived  in  the  field. 

In  some  cases  pieces  of  defective  cable,  removed  from  plant  in  clearing 
trouble,  may  be  found  in  the  scrap  heap.  If  these  pieces  can  be  identified 
as  to  their  previous  location  in  the  plant,  they  will  serve  a  real  purpose 
toward  the  solution  of  the  problem,  for  it  will  be,  of  course,  possible  to 
accurately  gauge  the  wire,  count  the  pairs  and  measure  the  diameters. 

In  Fig.  20  is  shown  the  classification  of  the  various  major  subdivisions 
of  the  outside  plant  under  the  Interstate  Commerce  Commission's  stand- 
ard system  of  accounts. 

188.  Block  and  House   Cable.  —  The  accurate  inventory  of  the 
block  and  house-cable  plant  is  one  of  the  most  difficult  problems  confront- 
ing the  appraisal  engineer.    Fortunately,  however,  except  in  the  case  of 
the  larger  cities,  a  comparatively  small  amount  of  this  type  of  construction 
is  encountered. 

Due  to  the  fact  that  block  and  house  cables  are  often  located  in  in- 
accessible places,  such  as  basements  and  shafts,  it  is  obviously  out  of  the 
question  to  measure  all  of  the  cable.  Usually,  however,  companies  main- 
tain reasonably  accurate  records,  in  the  form  of  blueprints  and  house 
diagrams  made  up  from  the  original  construction  plans,  of  this  portion 
of  the  plant. 

Probably  the  most  satisfactory  way  to  effect  the  inventory  of  the  block 
and  house-cable  plant  is  to  take  copies  of  these  plans  into  the  field  and 
check  them  wherever  cable  is  found  accessible,  thus  gaining  sufficient 
data  to  warrant  an  estimate  of  the  inaccessible  portions.  Terminals  are 
usually  located  in  readily  accessible  places,  and  should  be  carefully  checked. 

189.  Submarine  Cable,  Exchange  Account  246,  Toll  Account 
256.  —  "This  account  should  include  the  cost  of  submarine  cable,  cable 
towers,  loading  coils,  cable  boxes  and  fittings,  and  other  materials  used 
in  the  installation  of  such  cables,  and  other  costs  Incident  thereto." 

For  obvious  reasons  it  is  impossible  to  measure  submarine  cables  in 
the  field.  There  are  several  ways,  however,  by  which  the  necessary  data 
can  usually  be  obtained.  In  most  plants  submarine  cables  are  rather 
uncommon,  and  it  will  usually  be  found  that  a  record  of  the  length  of  the 
cable,  as  installed,  is  available  somewhere  in  the  records.  If  not,  it  is 
probable  that  some  employee  will  remember  the  time  that  the  cable  was 
placed  and  from  whom  it  was  purchased,  and  then  by  writing  to  the  manu- 
facturer the  necessary  information  can  be  obtained. 

If  neither  of  these  methods  proves  practicable,  the  length  of  the  sub- 
marine cable  can  be  computed  theoretically  by  ascertaining  the  total 
resistance  between  the  terminal  points  and  the  resistance  per  lineal  foot. 

Other  data  as  to  cable  terminals,  cable  towers,  anchorage,  etc.,  should 
be  obtained  and  recorded  in  sufficient  detail  to  facilitate  the  appraisal. 


100 


TELEPHONE  RATES  AND  VALUES 


CHAPTER  X 
INVENTORY   OF  MISCELLANEOUS  EQUIPMENT 

190 .  Items  of  Miscellaneous  Equipment.  —  The  consideration  of 
the  inventory  of  the  land,   buildings,   subscribers'   station  equipment, 
central  office  equipment  and  the  outside  plant  has  been  completed.    There 
still  remains,  however,  a  group  of  items  —  usually  of  comparatively  small 
monetary  value  —  which,  nevertheless,  are  most  important  to  the  success- 
ful operation  of  any  telephone  property.    These  miscellaneous  items  include 
General  Equipment,  Account  260,  Material  and  Supplies,  Account  122, 
and  Right  of  Way,  Account  207. 

191.  General  Equipment,   Account  260.  —  "This  account  should 
include  the  cost  of  the  equipment  classified  in  the  sub-accounts  hereunder. 
Items  of  small  value  or  short  life,  such  as  portable  tools  liable  to  be  lost 
or  stolen,  temporary  shelving,  waste  baskets,  gloves,  whips  and  the  like, 
should  not  be  included  in  this  account  or  the  sub-accounts  hereunder, 
but  should  be  charged  direct  to  the  operating  expense  accounts  or  to 
the  clearing  accounts." 

Under  this  heading  should  be  inventoried  office  furniture  and  fixtures, 
general  shop  equipment,  general  store  equipment,  general  stable  and 
garage  equipment,  and  all  of  the  miscellaneous  tools  and  implements 
used  in  maintaining  the  plant. 

It  is  hardly  necessary  to  give  a  detailed  outline  of  the  method  of  proce- 
dure for  inventorying  the  equipment  falling  under  account  260  and  sub- 
accounts  261-265,  inclusive.  The  instructions  quoted  in  the  following 
paragraphs  clearly  specify  the  nature  of  the  equipment  to  be  included 
under  each  of  these  accounts  and  these,  together  with  the  suggested  pre- 
cautions, should  be  sufficient.  The  inventory  resolves  itself  into  a  process 
of  accurately  counting  and  summarizing  the  equipment  involved. 

192.  Office  Furniture  and  Fixtures,  Account  261.  —  "This  account 
should  include  the  cost  of  desks,  tables,  chairs,  carpets,  cases,  movable 
partitions,   railings,   shelves,   typewriters,   addressing  machines,   adding 
machines  and  other  office  devices;    stoves,  portable  gas  and  electric 
fixtures,  and  other  office  fittings  (except  fittings  considered  a  part  of  the 
building  as  provided  for  in  Account  212,  Buildings,  and  telephone  equip- 
ment provided  for  under  Account  220,  Central  Office  Equipment)." 

The  inventory  of  the  office  furniture  and  fixtures  is  a  comparatively 
simple  matter.  It  is  usually  advisable  to  subdivide  this  portion  of  the 
inventory  according  to  the  location  of  the  equipment  involved,  i.e., 


IrKLBPHONE  RATES  AND  VALUES 

make  a  complete  separate  inventory  of  the  furniture  and  fixtures  in  the 
manager's  office,  in  the  general  office,  in  the  storeroom,  etc. 

In  this  connection  attention  is  called  to  the  portion  of  the  Interstate 
Commerce  Commission's  accounting  instructions  enclosed  within  paren- 
theses. Special  fittings  which  are  a  part  of  the  buildings  should  be  inven- 
toried under  Buildings,  Account  212,  and  not  under  furniture  and  fixtures. 
Movable  partitions,  counters,  railings  and  shelves  should  be  inventoried 
under  furniture  and  fixtures,  while  stationary  railings  and  counters,  which 
are  obviously  a  part  of  the  building  itself,  should  be  inventoried  under 
the  heading  "  Buildings." 

193.  General  Shop  Equipment,  Account  262. —  "This  account 
should  include  the  cost  of  all  equipment  specially  provided  for  general 
shops,  such  as  engines,  gas  producers,  electric  generators  and  other  power 
apparatus  used  in  operating  machinery  in  such  shops;    machine  tools, 
shafting,  belts  and  like  shop  equipment;   also  such  smithing  equipment 
in  general  shops  as  is  used  principally  for  general  purposes  other  than 
shoeing  horses  and  repairing  vehicles. 

"Hand  and  other  small  portable  tools  liable  to  be  lost  or  stolen  should 
not  be  included  herein,  but  portable  tools  and  apparatus  of  special  value 
may  be  charged  to  this  account  and  remain  herein  so  long  as  record  is 
kept  of  such  tools  and  apparatus." 

In  connection  with  the  inventory  of  the  general  shop  equipment,  special 
attention  is  called  to  the  last  paragraph  of  the  foregoing  Interstate  Com- 
merce Commission's  accounting  system  instructions.  All  of  the  small 
portable  tools,  which  frequently  have  to  be  replaced,  should  be  omitted 
entirely  from  the  inventory.  The  cost  of  these  items  is  obviously  a  part 
of  the  operating  expense. 

194.  General  Store  Equipment,  Account  263. — "This  account 
should  include  the  cost  of  all  equipment  of  general  store  structures,  such 
as  movable  counters,  movable  shelving  and  other  movable  equipment 
of  like  nature;    carts,  barrows,  trucks,  tools,  etc.,  and  other  apparatus 
and  appliances  used  in  handling,  storing,  or  packing  materials  and  supplies. 

"Counters,  shelving  and  the  like  which  ..are  permanently  attached  to 
the  structure  should  be  charged  to  Account  212,  Buildings,  and  not  to 
this  account." 

In  inventorying  the  general  store  equipment,  it  is  most  important 
that  permanent  counters,  shelving  and  fixtures  —  which  are  obviously 
a  part  of  the  building  —  should  be  included  with  the  cost  of  the  building 
and  not  listed  under  the  heading  "General  Store  Equipment." 

195.  General  Stable  and  Garage  Equipment,  Account  264.  - 
"This  account  should  include  the  cost  of  all  equipment  of  general  stables, 
including  horses,  harness,  drays,  wagons,  automobiles  and  other  vehicles; 
equipment  of  shoeing  shops,  harness-repair  shops,  vehicle-repair  shops, 
etc." 


INVENTORY  OF  MISCELLANEOUS  EQUIPMENT        103 

It  frequently  happens  that  a  large  portion  of  the  stable  and  garage 
equipment  of  a  telephone  company  consists  of  second-hand  automobiles, 
motorcycles,  wagons,  trucks,  etc.  It  is  most  important  that  the  repro- 
duction cost  assigned  to  this  portion  of  the  equipment  should  be  repro- 
duction new,  and  not  actual  cost  to  the  company.  Many  appraisers 
make  the  mistake  of  appraising  second-hand  material  at  the  cost  to  the 
owner.  This  is  obviously  wrong  and  entirely  inconsistent  with  the  re- 
production cost  theory. 

To  facilitate  a  clearer  understanding  of  this  matter  of  the  appraisement 
of  second-hand  equipment  the  following  illustration  is  given:  — 

A  telephone  company  possessed  of  a  number  of  second-hand  Ford  cars 
desires  a  1-ton  truck  for  material  distribution  purposes.  It  finds  that  by 
utilizing  various  automobile  parts  at  hand  it  can  build  up  a  truck  of  the 
desired  capacity  at  a  comparatively  small  cost.  Assuming  that  the  1-ton 
truck  resulting  from  this  makeshift  perfectly  meets  the  requirements 
for  which  it  was  designed,  the  reproduction  cost  of  the  truck  would  be 
the  prevalent  market  price  of  a  standard  truck  of  the  same  horsepower 
and  capacity  of  the  one  in  question. 

The  fact  that  the  truck  under  consideration  is  a  makeshift,  and  not 
the  exact  equivalent  of  a  new  truck  of  standard  make,  can  be  cared  for 
in  the  determination  of  the  present,  or  depreciated,  value. 

196.  General    Tools    and   Implements,    Account   265. —  "This 
account  should  include  the  cost  of  portable  testing  apparatus  and  valuable 
tools  and  implements  devoted  to  the  maintenance  or  construction  of 
the  telephone  plant,  and  not  provided  for  in  the  equipment  accounts. 
This  does  not  include  tools  not  yet  in  use  carried  as  supplies  unissued." 

In  inventorying  general  tools  and  implements  it  is  important  that  the 
precaution  outlined  under  general  shop  equipment,  section  193,  should 
be  carefully  observed,  i.e.,  "Hand  and  other  small  tools  liable  to  be  lost 
or  stolen  should  not  be  included  herein,  but  portable  tools  and  apparatus 
of  special  value  may  be  charged  to  this  account  and  remain  herein  so  long 
as  record  is  kept  of  such  tools  and  apparatus." 

197.  Material  and  Supplies,  Account  122.  —  "This  account  should 
include  the  cost  of  unapplied  material,  including  the  value  of  material 
temporarily  in  use  and  not  charged  out  in  the  company's  accounts;  articles 
in  process  of  manufacture  by  the  company;   tools?  fuel,  stationery  and 
other  supplies.    Freight  and  express  charges  paid  on  the  material  included 
in  this  account  should  be  included  in  the  value  of  such  material." 

There  is  little  that  can  be  said  regarding  the  inventory  of  material  and 
supplies,  except  that  the  equipment  involved  should  be  described  in 
sufficient  detail  to  properly  effect  its  subsequent  identification  and  appraise- 
ment. It  will  usually  be  found  that  the  company  has  a  reasonably  accurate 
inventory,  and  the  use  of  this  inventory  will  probably  considerably  ex- 
pedite the  work. 


104        TELEPHONE  RATES  AND  VALUES 

198.  Right  of  Way,  Account  207.  —  "This  account  should  include 
the  cost  of  all  land  and  interests  in  land  acquired  for  the  location  of  tele- 
phone wires,  cables,  pole  lines  and  conduits;    salaries  and  expenses  of 
right-of-way  agents;   expenses  of  appraisals  and  of  juries,  commissioners 
or  arbitrators  in  condemnation  cases;    real-estate  brokers'  commissions; 
cost  of  plats,  abstracts,  notarial  fees,   examination  of  title,  recording 
deeds,  etc. 

"This  account  should  also  include  the  first  cost  of  acquiring  leaseholds 
of  land  for  right  of  way,  the  terms  of  which  are  more  than  one  year  each, 
whether  acquired  through  direct  lease,  assignment  or  otherwise  (but  not 
including  the  rents  paid  periodically  in  consideration  of  rights  obtained 
under  such  leases).  If  any  such  leasehold  is  acquired  by  assignment,  the 
charge  to  this  account  must  not  exceed  the  amount  actually  paid  therefor 
by  the  accounting  company  to  the  assignor." 

The  inventory  of  the  right  of  way  may  be  divided  into  three  general 
classifications :  — 

1.  Right  of  way  for  poles  located  on  public  highways. 

2.  Right  of  way  for  poles  located  on  private  property. 

3.  Right  of  way  for  telephone  cables,  wires  and  cross  arms  placed  on 
the  poles  of  foreign  utility  companies. 

It  will  be  remembered  that  the  field  form  for  pole  line  equipment  pro- 
vides a  space  for  tabulating  poles  located  on  private  property.  The 
total  of  these  poles  subtracted  from  the  grand  total  of  all  the  poles  in- 
ventoried will  give  the  number  of  poles  located  on  public  highways. 

By  reviewing  the  field  data  it  will  be  possible  to  Ascertain  accurately 
the  number  of  the  telephone  company's  attachments  on  foreign  poles. 
The  resulting  data,  together  with  the  inventory  of  poles  on  private  property 
and  public  highways,  should  be  supplemented  by  a  careful  check  of  the 
company's  records. 

199.  Next  Step  in  Appraisement.  —  In  a  very  general  way  all  of 
the  elements  involved  in  the  inventory  of  a  telephone  property  have 
been  discussed.    It  must  be  realized  that  the  method  of  procedure  outlined 
is  merely  intended  as  a  guide,  and  that  the  individual  requirements  of 
specific  cases  may  necessitate  the  adoption  of  radical  modifications  of  the 
plan  suggested. 

The  next  step  in  the  appraisement  of  the  inventoriable  property  is  the 
preparation  of  the  unit  costs,  and  this  problem  will  be  considered  in 
detail  in  the  following  chapter. 


CHAPTER  XI 
PRELIMINARY  DISCUSSION   OF   UNIT   COSTS 

200.  Importance  of  Unit  Costs.  —  It  is  hard  to  say  which  phase 
of  the  appraisement  problem  is  more  important,  the  inventory  of  the 
physical  property  or  the  preparation  of  the  unit  costs.     One  thing  we  do 
know,  however,  and  that  is,  assuming  honesty  of  purpose  and  a  reasonable 
degree  of  efficiency  on  the  part  of  the  field  inspectors,  most  of  the  inventory 
errors  will  be  found  compensating.     For  instance,  errors  of  omission  in 
inventorying  the  wire  plant  will  probably  be  nearly  offset  by  errors  of 
commission. 

Experience  has  proven,  however,  that  plant  is  more  frequently  left 
out  entirely  than  duplicated;  hence  the  almost  universal  practice  of 
adding  a  specific  allowance  to  the  reproduction  cost  of  the  inventoriable 
property  to  cover  omissions.  However,  if  an  erroneous  assumption  is 
made  as  to  the  labor  or  material  costs  when  building  up  the  wire  unit 
costs,  and  if  these  unit  costs  are  used  as  a  basis  for  appraising  all  of  the 
wire  plant,  it  will  be  readily  seen  that  a  serious  error  may  result.  Then, 
again,  a  regulatory  body  is  much  more  likely  to  make  a  detailed  analysis 
of  the  unit  costs  than  of  the  inventory  of  physical  property. 

A  few  errors  in  the  unit  costs  —  even  if  they  are  of  a  minor  nature  — 
may  tend  to  cast  suspicion  on  the  entire  appraisal,  including  inventory, 
collateral  costs  and  intangible  values. 

It  will  therefore  be  seen  that  the  preparation  of  the  unit  costs  is  a 
most  important  feature  in  the  appraisal  of  telephone  properties.  This 
portion  of  the  work  should  be  carried  on  under  the  direct  supervision  of 
the  appraisal  engineer,  and  every  unit  cost,  before  it  is  applied  to  the 
inventory,  should  be  subjected  to  the  most  careful  analysis  by  the  ap- 
praisal engineer,  and  should  be  checked  by  every  available  means.  For 
obvious  reasons  the  unit  costs,  if  determined  by  a  disinterested  appraisal 
engineer,  will  carry  more  weight  before  reviewing  bodies  than  if  prepared 
by  an  engineer  who  is  an  employee  of  the  company  submitting  the  ap- 
praisal. 

201.  Unit  Costs  and  the  Inventory.  —  Long  before  the  completion 
of  the  field  work  the  unit  cost  study  should  be  well  under  way,  and  every 
effort  made  to  complete  each  set  of  unit  costs  by  the  time  the  corre- 
sponding portion  of  the  inventory  is  finished.    In  this  way  the  confusion, 
so  often  noticeable  during  the  last  stages  of  a  public  utility  appraisal, 
may  be  entirely  avoided. 


106        TELEPHONE  RATES  AND  VALUES 

The  pole  and  wire  inventory  is  usually  the  first  to  be  completed  in 
the  field.  By  having  the  pole  and  wire  unit  costs  ready  for  use  immediately 
upon  completion  of  the  inventory,  this  portion  of  the  appraisal  may  be 
disposed  of  in  a  comparatively  short  time. 

202.  Material  Prices  at  Time  of  Appraisal.  —  The  first  step  in  the 
preparation  of  the  unit  costs  consists  in  the  determination  of  material 
prices  as  of  date  of  appraisal.    Quotations  should  be  secured  from  dealers 
in,  and  manufacturers  of,  every  class  of  equipment  found  in  the  plant. 
For  equipment  usually  purchased  on  a  competitive  basis  —  poles,  cross 
arms,  wire,  cable  and  conduit  —  quotations  should  be  secured  from  a 
number  of  concerns.     Highly  specialized  equipment,  such  as  telephone 
switchboards,  private  exchanges  and  subscribers'  instruments,  can,  as  a 
rule,  be  exactly  reproduced  only  by  the  original  manufacturers,  and  every 
effort  should  be  made  to  ascertain  prevalent  market  prices  of  various 
apparatus  and  material  as  of  the  appraisal  date. 

203.  Determination  of  Material  Prices  for  Period  preceding 
Appraisal.  —  Having  obtained  all  possible  data  relative  to  fair  prices, 
as  of  the  date  of  appraisal,  the  next  step  involves  the  determination  of 
corresponding  prices  for  the  several  years  preceding  the  appraisal.    Usually 
the  best  way  to  accomplish  this  end  is  to  assign  one  or  more  men,  accord- 
ing to  the  individual  requirements  of  the  case  in  hand,  to  the  task  of 
reviewing  the  company's  invoices  for  the  several  years  preceding  the 
appraisal. 

For  each  class  of  material  the  following  data  should  be  noted:  date  of 
purchase,  quantity  purchased,  name  of  manufacturer  or  dealer,  the  total 
cost  and  the  unit  cost. 

Prices  that  seem  abnormally  high  or  abnormally  low  should  be  care- 
fully investigated  before  they  are  accepted  for  use  in  the  final  determina- 
tion of  the  unit  costs. 

204.  Fair  Material  Prices  for  Appraisal  Use. —  With  this  data- 
the  market  prices  for  the  various  types  of  equipment  as  of  the  appraisal 
date  and  for  the  several  years  preceding  the  appraisal  —  tabulated  in 
proper  form,  the  determination  of  fair  material  prices  for  use  in  the  ap- 
praisal under  consideration  is  a  comparatively  simple  problem. 

It  is  possible  that  the  reader  may  gain  the  impression  from  the  fore- 
going discussion  that  average  prices  for  the  several  years  preceding  the 
appraisal  should  be  used  in  all  cases.  This  is  not  necessarily  true.  Take, 
for  instance,  the  present  material  market.  It  is  undoubtedly  true  that 
the  conditions  resulting  from  the  present  war  will  continue  to  affect 
the  material  markets  for  some  years  to  come,  even  if  peace  is  declared 
within  the  next  few  months.  Obviously,  the  appraisal  engineer  in  deriving 
fair  material  prices  as  of  the  present  date  must  take  into  consideration 
the  fact  that  although  prices  are  higher  now  than  they  have  been  for 


PRELIMINARY  DISCUSSION   OF  UNIT  COSTS         107 

some  years  past,  there  is  every  reason  to  suppose  that  present  market 
conditions  will  prevail  for  some  years  to  come. 

In  the  last  analysis  a  determination  of  fair  material  prices,  as  of  the 
appraisal  date,  is  dependent  not  only  upon  the  prevailing  prices  for  the 
several  years  preceding  the  appraisal,  but  also  upon  the  possible  market 
trend  during  the  several  years  following  the  appraisal. 

The  appraisal  engineer  must  take  into  account:  first,  past  market 
conditions;  second,  market  conditions  as  of  the  appraisal  date;  and 
third,  the  probable  trend  of  the  future  material  market.  In  other  words, 
having  all  of  the  available  facts  in  his  possession  bearing  on  the  problem 
under  consideration,  the  appraisal  engineer  must  use  his  best  judgment 
in  determining  fair  material  prices  for  the  appraisal  in  hand. 

205.  Unit  Labor  Costs.  —  The  labor  cost  study  is  considered  after 
the  fair  material  prices  have  been  determined.    Work  orders  and  com- 
pleted estimates  for  the  several  years  preceding  the  appraisal  should  be 
carefully  reviewed,  and  all  possible  data  pertaining  to  the  cost  of  setting 
poles,  placing  cross  arms,  stringing  wire  and  cable,  building  conduit,  etc., 
should  be  tabulated  in  such  a  form  as  to  render  possible  a  careful  analysis 
of  past  and  present  labor  conditions. 

The  utmost  care  should  be  exercised  in  selecting  records  of  completed 
work  that  represent  average  conditions,  —  conditions  that  approximate 
as  nearly  as  possible  those  that  would  probably  be  encountered  in  repro- 
ducing the  plant  as  of  the  appraisal  date. 

Obviously,  unit  costs  derived  from  job  orders  covering  small  installa- 
tions cannot  be  considered  as  representative  for  the  purpose  under  dis- 
cussion. Unit  labor  costs  are  necessarily  much  higher  for  piecemeal 
than  for  wholesale  construction. 

Another  and  a  very  practical  source  of  unit  cost  data  will  be  found 
in  the  foremen  in  charge  of  the  various  construction  and  installation 
gangs.  Many  telephone  foremen,  for  their  own  information,  keep  a 
detailed  record  of  the  time  spent  on  the  various  kinds  of  work  falling 
under  their  jurisdiction. 

It  is  also  true  that  men  who  have  been  in  the  employ  of  a  company  for 
a  long  period  of  time  are  apt  to  be  well  posted  as  to  soil  and  subsurface 
conditions  encountered  in  the  original  plant  construction. 

206.  Use  of  Curves  to  show  Fluctuations  of  Prices.  —  When  all 
of  the  available  sources  of  information  have  been  properly  tabulated, 
the  resultant  data  should  be  a  great  help  in  the  determination  of  fair 
unit  costs.    In  this  connection,  curves  showing  graphically  the  fluctuation 
of  material  and  labor  prices  over  the  period  of  years  preceding  an  appraisal 
will  be  found  a  material  help  to  the  appraisal  engineer. 


CHAPTER  XII 
UNIT   COSTS   FOR  REAL   ESTATE  AND   EQUIPMENT 

207.  Land  Appraising  and  Purposes.  —  As  has  been  previously 
stated  in  the  discussion  of  land  in  Chapter  VII,  courts  and  commissions 
have  usually  ruled  that  the  appraisal  of  a  utility  corporation's  land  should 
not  be  made  by  a  consulting  engineer,  but  rather  by  a  real  estate  expert. 
Nevertheless,  even  if  a  competent  expert  is  employed  for  this  portion  of 
the  work,  it  is  always  well  for  the  appraisal  engineer  to  carefully  verify  the 
findings  of  the  expert. 

It  frequently  happens  that  appraisals  are  made  for  other  purposes 
than  as  a  basis  for  rate  making.  The  writer  has  just  completed  an  ap- 
praisal of  the  property  of  a  small  telephone  company  located  in  a  State 
where  public  utility  corporations  are  not  at  the  present  time  subject  to 
the  dictates  of  a  public  service  commission.  This  company  merely  desired 
to  gain  as  accurate  a  knowledge  as  possible  of  its  tangible  and  intangible 
assets,  so  that  it  would  be  in  a  position  to  properly  administer  its  financial 
affairs. 

Cases  of  this  kind  are  numerous,  and  with  the  thought  that  the  em- 
ployment of  a  separate  real  estate  expert  for  land  appraisal  is  a  rather 
expensive  proposition,  it  is  proposed  to  consider  this  subject  of  land  unit 
costs  and  land  appraisals  more  specifically  than  was  done  in  the  foregoing 
treatment  of  the  subject  of  land  inventories. 

208.  Differing  Opinions  as  to  Theory  to  be  used  in  Land  Ap- 
praising. —  The  proper  method  of  appraising  the  land  of  a  public  utility 
corporation  is  a  subject  upon  which  there  is  a  marked  difference  of  opinion 
between  experts.    It  has  been  argued  that  there  is  no  logical  reason  why 
land  or  right  of  way  belonging  to  a  utility  company  should  be  considered 
on  a  different  basis  from  that  of  similar  property  owned  by  an  individual. 
On  the  other  hand,  it  is  unquestionably  true  that  the  development  of 
utility  properties  has  often  increased  the  value  of  the  adjoining  land. 
This  is  especially  true  in  the  case  of  railroads. 

Land  along  a  railroad  right  of  way  is  obviously  much  more  valuable 
after  the  railroad  has  been  built  than  before.  Some  experts  argue  that 
in  evaluating  the  land  or  right  of  way  of  a  railroad  company  this  fact  of 
increased  values  of  adjoining  properties  should  be  given  due  weight,  and 
the  railroad  allowed  to  benefit  by  the  general  increase  in  prices. 

If  this  theory  is  conceded  to  be  a  reasonable  one,  then  it,  of  course, 
follows  that  the  utility  corporation  must  suffer  the  consequences  if  the 


UNIT  COSTS  FOR  REAL  ESTATE  AND  EQUIPMENT      109 

use  made  by  it  of  certain  parts  of  its  plant  has  caused  a  decrease  in  the 
value  of  the  surrounding  property.  It  will  be  readily  seen  that  the  use  of 
land  for  car  barns,  storage  yards,  etc.,  may  be  considered  objectionable 
in  a  residential  district,  and  may  cause  a  decrease  in  surrounding  property 
values. 

The  attitude  of  the  courts  on  this  subject  is  evidenced  by  the  following 
quotation  from  the  Columbus  Southern  Railway  v.  Wright,  151  U.  S. 
481:- 

The  value  of  the  land  depends  largely  upon  the  use  to  which  it  can  be  put,  and 
the  character  of  the  improvements  upon  it. 

209.  Methods    of   appraising    Land.  —  There    are   two    generally 
accepted  methods  of  determining  the  value  of  land,  —  first,  the  expert 
method;    and  second,  the  sales  method. 

Each  of  these  methods  has  been  subjected  to  a  good  deal  of  criticism. 
Hence  in  appraising  the  land  of  a  telephone  company,  as  already  suggested, 
it  is  usually  advisable  to  employ  both  of  these  methods,  so  that  if  one  of 
them  is  objected  to  by  the  court  or  commission  in  question  the  other 
may  be  substituted. 

210.  Expert  Method  of  Land  Appraisal.  —  The  expert  method,  as 
already  stated,  consists  of  the  appraisal  and  description  of  the  land  by 
competent  local  real  estate  experts.    If  the  land  under  consideration  is 
valuable,  and  if  its  value  forms  an  appreciable  portion  of  the  total  value 
of  the  plant,  it  is  advisable  to  employ  two  or  more  experts  to  work  upon 
the  problem  independently. 

In  a  case  of  this  kind  a  fair  value  of  the  land  in  question  may  often 
be  obtained  by  averaging  the  respective  values  submitted  by  the  experts. 
This  latter  plan,  however,  has  the  disadvantage  of  disqualifying  the 
experts  for  testimony  before  the  commission.  Of  course,  no  expert  will 
be  willing  to  take  the  stand  and  testify  to  a  modification  of  his  original 
estimate. 

If  this  averaging  plan  is  employed  in  determining  the  value  of  a  telephone 
company's  land,  it  should  be  accompanied  by  a  careful  and  detailed  ex- 
planation of  just  how  the  final  value  of  the  land,  as  submitted  in  the 
appraisal,  was  obtained.  Then  if  the  court  agrees  to  the  propriety  of 
averaging  the  land  valuations  submitted  by  a  number  of  experts,  the 
experts  may  be  subsequently  called  to  verify  their  individual  estimates. 

211.  Sales  Method  of  valuing  Real  Estate.  —  In  a  decision,  March 
8,  1910,  the  Wisconsin  Railroad  Commission,  in  the  case  of  the  State 
Journal  Printing  Co.  v.  Madison  Gas  &  Electric  Co.,  discusses  the  sales 
method  of  valuing  real  estate.    It  says :  — 

The  sales  method  of  valuing  real  estate  was  used  partially  in  the  Michigan  rail- 
way appraisals  of  1900-01,  and  in  the  light  of  the  experience  gained  in  that  work 
the  method  was  adopted  in  the  Wisconsin  steam  road  valuation  made  under  the 


110        TELEPHONE  RATES  AND  VALUES 

provisions  of  the  ad  valorem  assessment  law  of  1903.  It  has  since  been  extensively 
used  in  Wisconsin  and  elsewhere  in  connection  with  important  valuations  of  public- 
service  properties  for  both  rate-making  and  taxation  purposes,  and  is  generally 
accepted  as  a  valuable  aid  to  the  judgment  by  experts  engaged  in  such  valuation 
work  on  a  large  scale. 

The  sales  method  may  be  denned  as  a  plan  or  process  for  the  systematic  collec- 
tion and  comparison  of  data  relating  to  real  estate  transfers  for  the  purpose  of 
estimating  true  market  realty  values.  It  consists  in  a  study  of  the  transfers  of 
neighboring  property  having  conditions  or  characteristics  similar  to  the  land  whose 
value  is  to  be  determined,  and  is  intended  to  duplicate,  as  nearly  as  may  be,  the 
mental  or  judicial  processes  ordinarily  employed  by  the  so-called  "local  real  estate 
expert,"  with  a  view  to  arriving  at  results  approximating  those  which  would  be 
reached  by  such  local  expert  acting  without  bias  or  suggestion. 

The  sales  method  is  capable  of  application  in  a  variety  of  ways;  in  fact,  is  as 
flexible  in  its  possible  applications  as  are  the  varied  methods  employed  by  individual 
local  experts.  Two  interpretations  of  the  sales  method  have  been  most  commonly 
employed.  In  one  of  these  the  area  and  consideration  in  each  sale  of  similarly 
situated  land  is  found,  and  the  average  unit  price  —  per  square  foot,  per  foot 
frontage,  per  lot,  per  acre,  etc.,  —  ascertained,  and  this  unit  applied  to  the  tract 
under  investigation. 

The  other  application  of  the  method  introduces  what,  in  many  cases,  is  believed 
to  be  an  additional  safeguard,  consisting  of  the  use  of  the  average  assessed  value 
of  adjacent  or  similarly  situated  lands  in  combination  with  an  average  ratio  or 
percentage  representing  the  relationship  of  the  assessed  value  of  transferred  lands 
to  the  total  consideration  paid  for  such  transferred  lands  in  the  district  or  locality 
under  consideration,  all  of  these  figures  being  based  on  the  "ground  values"  exclusive 
of  the  improvements  thereon. 

Such  use  of  assessment  figures  is  designed  to  introduce,  as  far  as  may  be,  the 
results  of  the  judicial  processes  of  the  assessor,  who,  at  least  in  theory,  serves  on 
behalf  of  the  public  as  an  unbiased  expert  in  the  matter  of  relative  valuations,  and 
who  attempts  to  make  allowance  for  the  peculiar  attributes  or  characteristics  of 
individual  parcels  of  real  estate  in  any  given  locality  or  neighborhood  of  a  city. 

In  the  broader  and  more  flexible  applications  of  the  sales  method,  the  expert 
adopts  one  or  the  other  of  the  processes  just  outlined,  or  blends  the  two  together 
in  such  fashion  as  to  yield  the  most  consistent  and  trustworthy  final  result.  In 
the  process  of  valuing  a  tract  of  land  involving  conflicting  data,  as  in  the  case  under 
consideration,  the  expert  user  of  the  sales  method  on  this  flexible  basis  derives  a 
series  of  tentative  results  similar  to  the  results  representing  the'  judgments  of 
individual  local  experts. 

The  judicial  function  involved  in  the  discriminating  selection  of  data  and  in 
the  derivation  of  final  results  is  exercised  along  essentially  parallel  lines  with  the 
two  classes  of  experts  here  compared.  The  further  act  of  the  judgment  in  selecting 
a  final  preferred  valuation  figure  in  the  light  of  a  group  of  preliminary  or  tentative 
results  is  idenitcal  in  the  two  cases. 

In  the  particular  valuations  here  considered,  the  similarity  of  the  basis  is  further 
emphasized  by  the  fact  that  the  results  by  the  sales  method  represent  the  composite 
judgment  of  four  members  of  the  commission's  expert  staff,  as  against  an  equal 
number  of  local  real  estate  experts  employed  by  the  company.  Although  it  is 
frankly  conceded  that  the  tentative  land  valuation  figures  first  reported  were 
derived  by  a  comparatively  restricted  application  of  the  sales  method,  issue  is 
here  taken  with  certain  claims  made  in  the  argument  by  counsel  for  company.  In 
view  of  the  repeated  favorable  reference  by  counsel  to  the  judgment  of  the  assessor 
with  respect  to  relative  values  (argument  on  behalf  of  company,  pp.  30,  31,  32,  37, 


UNIT  COSTS    FOR  REAL  ESTATE  AND  EQUIPMENT     111 

39),  the  criticism  of  a  similar  use  of  the  assessor's  judgment  by  the  commission's 
experts  need  scarcely  be  considered,  except  with  respect  to  the  misapprehension 
by  counsel  (argument,  p.  43)  as  regards  the  fluctuation  of  the  assessment  ratio  in 
Madison. 

Entirely  aside  from  the  claim  that  assessment  ratios  should  not  be  depended 
upon  in  making  land  valuations,  counsel  contends  that,  in  any  event,  a  general 
assessment  ratio  should  not  be  used  in  the  case  under  consideration,  chiefly  because 
of  a  supposed  "radical  difference  as  between  different  sections  or  localities"  in 
the  city  of  Madison. 

212.  Appraisement  of  Buildings,  Account  212.  —  The  appraise- 
ment of  the  buildings,  like  that  of  the  land,  is  usually  relegated  by  courts 
and  commissions  to  specialists,  as  has  been  previously  stated.    Most  of 
the  State  commissions  take  the  stand  that  the  appraisement  of  the  build- 
ings can  be  much  better  effected  by  architects  or  building  contractors 
than  by  the  appraisal  engineer.    With  all  due  respect  to  the  regulatory 
bodies  which  have  established  this  precedent  for  building  appraisals,  it 
is  rather  unfair  to  the  appraisal  engineer. 

Most  engineers  interested  in  telephone  utility  appraisement  problems 
are  thoroughly  familiar  with  the  telephone  business  from  a  purely  engineer- 
ing standpoint,  and  are  perfectly  competent  to  estimate  the  cost  of  build- 
ings used  for  telephone  purposes;  in  fact,  it  is  part  of  the  job  of  the  tele- 
phone engineer  to  be  thoroughly  posted  on  building  matters.  In  most 
cases  he  is  better  able  to  estimate  the  cost  of  the  special  type  of  buildings 
usually  required  for  telephone  purposes  than  are  most  of  the  general 
contractors  and  architects. 

There  are  so  many  variable  factors  entering  into  the  appraisement  of 
a  telephone  building  that  it  is  almost  impossible  to  give  accurate  unit 
costs  which  may  be  used  in  building  appraisement.  Suffice  it  to  say,  it 
is  possible  to  appraise  a  telephone  building  by  estimating  the  cubic  con- 
tents and  applying  a  unit  cost  per  cubic  foot,  this  cost  being  dependent 
upon  the  type  of  building  under  consideration. 

Buildings  may  also  be  appraised  by  applying  a  unit  cost  per  square 
foot  to  each  floor  of  the  building.  In  the  latter  case  this  unit  cost  per 
square  foot  would  vary  according  to  the  general  use  to  which  the  iloor 
in  question  is  put. 

213.  Appraisement  of   Central   Office   Telephone   Equipment, 
Account  221.  —  The  unit  costs  used  in  central  office  equipment  are  so 
largely  dependent  upon  the  exigencies  of  individual  cases  that  it  is  practi- 
cally out  of  the  question  to  give  any  specific  data. 

As  a  general  rule  it  may  be  said  that  the  appraisement  of  telephone 
switchboards,  frames  and  racks  can  be  best  effected  by  ascertaining  the 
manufacturers'  name,  and  the  type,  ultimate  capacity  and  present  equip- 
ment of  the  apparatus  in  question,  referring  directly  to  the  manufacturer 
for  prices  as  of  the  appraisal  date.  These  prices  may  subsequently  be 


112        TELEPHONE  RATES  AND  VALUES 

modified  if,  in  the  appraiser's  judgment,  they  are  unduly  high  due  to 
some  peculiar  condition  in  the  material  or  labor  markets  at  the  time  of 
the  appraisal. 

214.  Other  Equipment  of  Central  Offices,  Account  222.  —  This 
account,  it  will  be  remembered,  includes  all  furniture  and  equipment, 
other  than  telephone  equipment,  in  the  central  office  operating,  retiring 
and  lunch  rooms,  etc.    A  large  part  of  this  equipment  consists  simply  of 
ordinary  furniture,  such  as  chairs,  tables,  etc.,  and  prices  can  be  readily 
obtained  from  the  appraiser's  files,  or  from  local  dealers  in  equipment  of 
the  type  under  consideration. 

215.  Appraisal  of  Station  Apparatus,  Account  231.  —  The  ap- 
praisal of  the  station  apparatus,  or  subscribers'  station  instruments,  should 
be  prefaced  by  a  careful  review  of  telephone  instrument  prices  as  of  the 
date  of  appraisal  and  for  the  several  years  preceding  the  appraisal.    To 
conform  with  the   Interstate   Commerce  Commission's   accounting  in- 
structions, only  the  price  of  the  instrument  should  be  included  under  the 
231   account.     All  additional  material  and  labor  costs  incurred  in  the 
installation  of  the  instrument  will  be  appraised  under  Station  Installations, 
Account  232. 

In  cases  where  it  is  impossible  to  segregate  various  types  of  instru- 
ments i.e.  wall,  desk,  etc.,  in  the  process  of  taking  inventory,  an  allowance 
should  be  made  in  building  up  the  unit  cost  per  instrument  for  the  fact 
that  the  instruments  are  probably  not  of  one  type.  For  instance,  if  after 
consultation  with  the  plant  authorities  it  is  found  reasonable  to  assume 
that  75  per  cent  of  the  instruments  are  of  the  hotel  wall  type,  15  per  cent 
of  the  desk  type,  and  10  per  cent  of  the  long-back  wall  type,  the  unit 
cost  should  be  correspondingly  weighted. 

216.  Station  Installations,  Account  232.  —  The  Station  Installa- 
tion Account,  it  will  be  recalled,  covers  the  cost  of  all  material  and  labor 
used  in  placing  the  telephone  instrument  on  the  subscriber's  premises. 
To  quote  the  Interstate  Commerce  Commission :  — 

This  account  should  include  the  cost  of  installing  station  apparatus  and  the 
cost  of  inside  wires;  that  is,  the  wires  (or  cables)  from  the  instruments  to  the  point 
of  entrance  to  the  building,  where  the  drop  wires  or  interior  block  wires  terminate; 
or  to  the  junction  boxes,  where  the  house  cable  or  other  cable  terminates,  including 
wires  on  the  same  premises  to  connect  main  and  extension  stations;  or  to  connect 
the  private  branch  exchange  distributing  frames  with  their  terminal  stations. 

The  following  is  an  illustration  of  the  computation  of  an  installation 
unit  cost  as  taken  from  a  recent  telephone  appraisal: — 


UNIT  COSTS  FOR  REAL  ESTATE  AND  EQUIPMENT     113 

1  fuse,  at  $0.086, $0  0860 

16  feet  inside  wire,  at  $0.01735  a  foot, 2780 

10  feet  duplex  bridle  wire,  at  $0.0088  a  foot, 0880 

2  porcelain  knobs,  at  $0.00975  each *      .           .           .  0195 

6  Perfection  nails,  at  $0.00085  each,    .           . 0051 

8  screws,  at  $0.00373  each,  0298 


Total  material, $0  5064 

Total  material  plus  2  per  cent  for  waste  and  loss,  ....  5165 

Labor  of  installing,  .       2  0000 


Total  installation  cost  per  station,          .  .  .  .  .  .     $2  5165 

217.  Interior  Block  Wires,  Account  233.  —  The  determination  of 
the  unit  costs  for  interior  block  wiring  is  rather  a  difficult  problem.    It 
may  be  effected  either  by  arriving  at  a  cost  per  foot  placed  of  wiring 
along  rear  building  walls  and  fences,  or  by  estimating  a  cost  per  station 
fed  by  interior  block  wiring. 

In  either  case  the  unit  costs  should  be  derived  by  going  over  a  number 
of  work  orders  and  determining  the  average  span  length  of  block  wire  and 
the  average  number  of  .rings,  etc.,  used  in  installation.  In  the  same  way 
an  estimate  may  be  made  of  the  length  of  time  necessary  for  installing  a 
block  wire  of  average  length. 

The  unit  costs  should  be  derived  in  a  manner  similar  to  the  one  outlined 
in  the  preceding  paragraph,  under  the  heading  "  Station  Installations." 

218.  Private    Branch    Exchanges,    Account    234.  —  The    private 
branch  exchange  account,  it  will  be  remembered,  includes  the  cost  of  the 
switchboards,    their    distributing    frames,    the    cables    connecting    such 
switchboards  and  distributing  frames,  and  the  cost  of  installation. 

Unit  costs  for  this  type  of  equipment  can  best  be  arrived  at  by  ascer- 
taining from  the  manufacturer  of  the  equipment  in  question  the  prices 
prevalent  as  of  the  appraisal  date,  and  making  suitable  additions  for 
cost  of  installation. 

219.  Booths  and  Special  Fittings,  Account  235.  —  The  Interstate 
Commerce    Commission's    accounting   instructions    specify    that    under 
account  235  shall  be  included  the  cost  of  booths  and  special  fittings,  — 
such  as  desks,  chairs,  fans,  cash  registers,  —  together  with  their  respective 
installation  costs. 

It  is  hardly  necessary  to  outline  a  specific  method  for  arriving  at  the 
unit  costs  of  equipment  of  this  nature.  It  is  only  necessary  to  refer  to 
manufacturer's  catalogues  and  obtain  reasonable  material  prices,  and 
make  suitable  additions  to  cover  the  probable  installation  costs. 


CHAPTER  XIII 
UNIT   COSTS  FOR  POLE  LINES 

220.  The  Pole  Line  Appraisal.  —  The  pole  account,  it  will  be  remem- 
bered, includes  poles,  cross  arms,  steps,  brackets,   anchors  and  guys. 
Needless  to  say,  it  is  necessary  to  derive  separate  unit  costs  for  each  of 
these  items.    With  the  exception  of  the  poles  themselves  and  the  cross 
arms,  it  is  usually  a  comparatively  simple  matter  to  determine  the  unit 
costs  as  used  for  appraising  the  property  falling  under  accounts  241  and 
251. 

The  unit  costs  will  usually  be  about  the  same  for  both  exchange  and 
toll  equipment,  with  the  possible  exception  that  the  toll  units  will  run  a 
little  higher  than  the  exchange  units,  due  to  the  increased  costs  of  doing 
work  at  a  distance  from  the  base  of  supplies.  In  other  words,  due  to  the 
fact  that  the  major  portion  of  a  toll  line  is  necessarily  located  on  rural 
highways,  the  cost  of  hauling  material  to  the  job  will  be  greater  than  in 
the  case  of  exchange  pole  line  construction.  The  fact  that  it  is  frequently 
necessary  for  the  company  to  board  the  men  increases  the  labor  item. 

221.  Pole  Unit  Costs.  —  The  first  step  in  preparing  the  pole  unit 
costs  is  the  determination  of  material  prices,  not  only  as  of  the  appraisal 
date,  but  also  for  a  period  of  several  years  preceding  the  appraisal.    These 
prices  should  be  determined  by  getting  quotations  from  a  number  of 
competent  concerns  and  tabulating  the  results  somewhat  in  the  manner 
shown  in  Fig.  21.     This  table  is  taken  from  a  recent  appraisal,  and  it 
happens  that  all  of  the  prices  were  taken  from  the  same  source,  —  the 
quotations  of  the  Western  Electric  Company. 


UNIT  COSTS  FOR  POLE   LINES 


115 


HEIGHT  (FEET). 

Top 

(Inches). 

Quotation 
8-28-14, 
f.  o.  b. 
Indian- 
apolis. 

Quotation 
12-16-14, 

f.  0.   b. 

Kokomo. 

Quotation 
6-28-15, 
f.  o.  b. 
De  Kalb. 

Average 
8-28-14, 
12-16-14, 
6-28-15. 

Quotation 
10-24-16, 
f.  o.  b. 
Decatur. 

20  

4 

$0  70 

$0  64 

$0  63 

$0  66 

$0  76 

5 

85 

74 

80 

80 

1  12 

6 

1  14 

1  03 

1  05 

1  07 

1  50 

25  

4 

98 

92 

94 

95 

1  22 

5 

1  15 

99 

1  10 

1  08 

1  72 

6 

2  15 

2  15 

2  00 

2  10 

2  55 

7 

3  05 

- 

3  00 

3  03 

3  75 

8 

3  90 

- 

3  90 

3  90 

5  95 

30  

4 

- 

- 

1  25 

1  25 

1  72 

5 

3  40 

3  40 

3  10 

3  30 

3  35 

6 

4  05 

4  05 

3  70 

3  93 

4  75 

7 

5  70 

5  70 

5  50 

5  63 

5  95 

8 

6  40 

- 

6  30 

6  35 

7  00 

9 

10  25 

- 

10  45 

10  35 

10  80 

35  

5 

- 

5  00 

5  05 

5  03 

4  75i 

6 

6  70 

6  70 

6  25 

6  55 

6  2Qi 

7 

8  90 

8  90 

9  05 

8  95 

7  OQi 

8 

10  25 

10  25 

10  45 

10  32 

8  70i 

9 

13  15 

- 

- 

13  15 

9  9Qi 

40,i     

6 

- 

- 

- 

7  92 

8  55 

7 

8  15 

- 

- 

8  15 

8  80 

8 

9  55 

- 

- 

9  55 

9  90 

9 

- 

- 

- 

11  50 

12  00 

45,i     . 

6 

_ 

10  55 

11  00 

7 

10  95 

- 

- 

10  95 

11  50 

8 

12  25 

- 

- 

12  25 

12  75 

50,i     .         .         ..        . 

7 

13  25 

- 

- 

13  25 

13  55 

8 

14  40 

'- 

- 

.     14  40 

14  80 

9 

- 

- 

- 

16  64 

17  10 

55,i     

8 

16  80 

- 

- 

.16  80 

- 

60,i     

7 

_ 

17  03 

17  50 

8 

- 

- 

- 

18  88 

19  40 

9 

- 

- 

- 

22  39 

23  00 

15,       

4 

- 

- 

- 

50 

- 

5 

- 

- 

- 

57 

- 

10  

2x4 

- 

- 

- 

40 

- 

FIG.  21. 


1  Western  or  red  cedar. 
Material  prices  for  western  and  northern  cedar  poles. 


116 


TELEPHONE  RATES  AND  VALUES 


The  next  step  involves  the  determination  of  proper  labor  units.  Fig. 
22  shows  a  rather  comprehensive  analysis  of  the  various  labor  costs  of 
poles  entering  into  the  preparation  for  use  in  a  telephone  property. 


INCHES. 

4 

4^ 

5 

5M 

6 

VA 

7 

8 

20-foot:  — 

Unloading,  .... 

$0  056 

$0  066 

$0  075 

$0  085 

$0  095 

$0  110 

$0  120 

$0  147 

Roofing, 

021 

025 

028 

031 

036 

038 

045 

055 

Hauling,   .... 

151 

178 

205 

231 

258 

290 

325 

398 

Digging,   .... 

250 

292 

338 

381 

429 

482 

540 

660 

Setting,    .... 

163 

190 

219 

248 

278 

312 

350 

428 

Supervision,  15  per  cent,  . 

096 

113 

130 

146 

164 

185 

207 

253 

Total,  .... 

$0  737 

$0  864 

$0  995 

$1  122 

SI  260 

SI  417 

$1  587 

$1  941 

25-foot:  — 

Unloading,  .... 

$0  081 

$0  094 

$0  109 

SO  123 

$0  138 

$0  153 

SO  170 

$0  206 

Roofing,   .... 

024 

028 

032 

036 

041 

046 

050 

061 

Hauling,   .... 

201 

236 

272 

309 

346 

381 

425 

515 

Digging,   .... 

336 

395 

454 

516 

578 

644 

710 

860 

Setting  

222 

262 

301 

343 

382 

426 

470 

569 

Supervision,  15  per  cent,  . 

130 

152 

175 

199 

223 

248 

274 

332 

Total,  .... 

$1  004 

$1  167 

11  343 

SI  526 

$1  708 

SI  898 

$2  100 

$2  543 

30-foot:  — 

Unloading,  .... 

$0  113 

$0  130 

$0  149 

$0  168 

$0  190 

$0  210 

$0  230 

$0  275 

Roofing,   .... 

027 

031 

036 

040 

045 

050 

055 

066 

Hauling,   .... 

270 

313 

356 

403 

453 

500 

550 

659 

Digging,   .... 

437 

507 

577 

655 

733 

812 

890 

1  066 

Setting  

305 

353 

402 

457 

511 

566 

620 

742 

Supervision,  15  per  cent,  . 

173 

200 

228 

258 

290 

321 

352 

421 

Total,  .... 

$1  325 

SI  534 

$1  748 

$1  981 

$2  222 

$2  459 

S2  697 

$3  229 

35-foot:  — 

Unloading,  .... 

$0  155 

$0  178 

$0  200 

$0  226 

$0  250 

$0  274 

SO  300 

SO  352 

Roofing,   .... 

031 

035 

040 

045 

050 

055 

060 

066 

Hauling,   .... 

360 

413 

466 

525 

585 

642 

700 

776 

Digging,   .    .    . 

556 

636 

716 

809 

902 

991 

1  080 

1  196 

Setting,    .... 

412 

473 

534 

601 

668 

734 

800 

886 

Supervision,  15  per  cent,  . 

227 

260 

293 

331 

368 

405 

441 

491 

Total  

$1  741 

$1  995 

$2  249 

$2  537 

$2  823 

S3  102 

S3  381 

$3  766 

FIG.  22.  —  Labor  costs  of  cedar  poles  in  city,  exclusive  of  painting,  stepping,  shaving  and  gaining. 


UNIT  COSTS  FOR  POLE  LINES 


117 


It  will  be  noted  that  in  Fig.  22  only  direct  supervision  is  provided  for. 
Direct  supervision,  in  this  case,  consists  of  a  proportionate  allowance  of 
the  wages  of  the  construction  foreman,  who  directs,  and  who  sometimes 
actually  participates  in,  the  work.  All  of  the  general  supervision,  or 
overhead  charges,  as  they  are  sometimes  called,  is  cared  for  under  the 
collateral  construction  costs,  as  we  have  already  seen  in  Chapter  V. 

Preliminary  to  the  preparation  of  Fig.  22,  it  is  necessary,  of  course, 
to  ascertain  the  prevalent  labor  rates  in  the  community  in  which  the  plant 
under  consideration  is  located,  and  to  further  ascertain  whether  or  not 
the  scale  of  wages  in  force  at  the  date  of  appraisal  is  of  average  conditions. 


City. 


HEIGHT  (FEET). 

Top 

(Inches). 

Pole 
Cost. 

2 
Per  Cent 
Waste 
and  Loss. 

Total 
Material. 

Total 
Labor. 

Cost 
Each. 

15, 

5 

$0  57 

SO  01 

$0  58 

$0  75 

$1  33 

20,   .    .    . 

4 

66 

01 

67 

77 

1  44 

5 

80 

02 

82 

1  03 

1  85 

6 

1  07 

02 

1  09 

1  31 

2  40 

25,   

4 

95 

02 

97 

1  04 

2  01 

5 

1  08 

02 

1  10 

1  40 

2  50 

6 

2  10 

04 

2  14 

1  78 

3  92 

7 

3  03 

06 

3  09 

2  19 

5  28 

8 

3  90 

08 

3  98 

2  65 

6  63 

30,   

5 

3  30 

07 

•3  37 

1  83 

5  20 

6 

3  93 

08 

4  01 

2  33 

6  34 

7 

5  63 

11 

5  74 

2  82 

8  56 

8 

6  35 

13 

6  48 

3  38 

9  86 

35  

5 

5  03 

10 

5  13 

2  38 

7  51 

6 

6  55 

13 

6  68 

2  98 

9  66 

7 

8  95 

18 

9  13 

3  57 

12  70 

8 

10  32 

21 

10  53 

3  95 

14  48 

40,i  

6 

7  92 

16 

8  08 

3  68 

11  76 

7 

8  15 

16 

8  31 

4  41 

12  72 

8 

9  55 

19 

9  74 

5  14 

14  88 

45,i  .    .   '.  •  . 

7 

10  95 

22 

11  17 

5  36 

16  53 

8 

12  25 

25 

12  50 

6  29 

18  79 

50,  i  

7 

13  25 

27 

13  52 

6  41 

19  93 

8 

14  40 

29 

14  69 

7  51 

22  20 

55,  l  . 

8 

16  80 

34  ' 

17  14 

8  73 

25  87 

60,i  

8 

18  88 

38 

19  26 

10  11 

29  37 

Rural  ar.d  Toll. 


15, 

4 

$0  50 

SO  01 

$0  51 

$0  75 

$1  26 

20,   

4 

66 

01 

67 

89 

1  56 

5 

80 

02 

82 

1  20 

2  02 

25  

5 

1  08 

02 

1  10 

1  62 

2  72 

6 

2  10 

04 

2  14  , 

2  06 

4  20 

7 

3  03 

06 

3  09 

2  53 

5  62 

30  

6 

3  93 

08 

4  01 

2  68 

6  69 

35  

6 

6  55 

13   ' 

6  68 

3  42 

10  10 

7 

8  95 

18 

9  13 

4  09 

13  22 

8 

10  32 

21 

10  53 

4  83 

15  36 

40,i  . 

7 

8  15 

16 

8  31 

5  04 

13  35 

10, 

2x4 

40 

01 

41 

50 

91 

1  Western  cedar. 
FIG.  23.  —  Summary  of  material  and  labor  costs  for  cedar  poles. 


118 


TELEPHONE  RATES  AND  VALUES 


Fig.  23  is  in  the  nature  of  a  summary  for  the  material  and  labor  units 
determined  in  Figs.  21  and  22.  It  will  be  noted  that  in  the  fourth  column 
of  Fig.  23,  an  allowance  of  2  per  cent  of  the  cost  of  the  pole  is  made  for 
waste  and  loss. 

This  allowance  is  customary  for  all  of  the  material  used  in  outside  plant 
construction.  Its  purpose  will  be  apparent  when  it  is  remembered  that  a 
certain  proportion  of  the  material  received  on  the  job  for  construction 
purposes  is  always  found  to  be  defective,  and,  in  the  case  of  smaller  articles, 
a  certain  proportion  is  usually  lost  or  stolen.  Experience  has  proven  that 
2  per  cent  is  a  fair  average  allowance  for  this  item  of  loss  and  waste. 

The  last  column  of  Fig.  23  shows  the  unit  costs  in  completed  form,  ready 
for  use  in  the  appraisement.  In  this  connection  it  should  be  noted  that 
the  labor  figures  as  given  in  Fig.  23  do  not  agree  with  those  quoted  in 
Fig.  22.  The  tables  are  merely  for  illustration  purposes  and  not  for  use 
in  actual  appraisal  work. 

222.  Cost  of  painting  Poles.  —  In  Fig.  24  is  presented  an  analysis 
of  the  cost  of  painting  poles.  Of  course  this  cost  for  poles  of  a  given  height 
will  vary  somewhat  according  to  the  diameter.  The  costs  given  in  the 
table  are  average  prices,  and  based  largely  upon  the  sizes  of  poles  most 
frequently  used,  —  5-inch,  20-foot;  5-inch,  25-foot;  6-inch,  30-foot,  etc. 


SIZE  (FEET). 

Material. 

Labor. 

Total  Cost. 

20,      

$0  23 

$0  19 

$0  42 

25  

35 

22 

57 

30,      

49 

24 

73 

35,      

57 

30 

87 

40,      

65 

37 

1  02 

45,      

74 

45 

1  19 

50,      

84 

53 

1  37 

55  

96 

62 

1  58 

60,      

1  07 

70 

1  77 

FIG.  24.  —  Cost  of  painting  poles. 

223.  Cross  Arm  Unit  Costs.  —  The  first  step  in  the  determination 
of  the  cross  arm  unit  costs  is  to  tabulate  all  of  the  data  as  to  cross  arm 
prices  at  the  date  of  the  appraisal  and  for  the  several  years  preceding  the 
appraisal,  in  much  the  same  form  as  that  suggested  for  poles  in  Fig.  21. 
Having  determined  the  material  prices,  the  unit  costs  will  be  built  up  in 
somewhat  the  following  manner:  — 


UNIT  COSTS  FOR  POLE  LINES 


119 


1  ten-pin  standard  120-inch  fir  cross  arm  at  $0.63, 
10  U-inch  by  8-inch  locust  pins  at  $0.0123, 

10  16-d.  nails  at  $0.0001,    . 

2  22-inch  cross  arm  braces  at  $0.051,  . 

2  f-inch  by  4-inch  carriage  bolts  at  $0.015, 

1  ^-inch  by  4-inch  fetter-drive  screw  at  $0.025,     . 

2  U-inch  washers  at  $0.003, 

1  |-inch  by  12-inch  machine  bolt  at  $0.077, 

2  21-inch  washers  at  $0.013, 

Total  material,  ...... 

Waste  and  loss  at  2  per  cent, 

Total  material,  including  waste  and  loss, 
Cost  of  placing  cross  arm,  . 

Unit  cost,     ...... 


$0  630 
123 
001 
102 
030 
025 
006 
077 
026 

$1  020 
020 

$1  040 
496 

$1  54 


As  previously  suggested,  the  labor  item  will  be  raised  slightly  for  use 
in  the  appraisal  of  the  toll  and  rural  plant. 

224.  Cost  of  Stepping.  —  In  many  plants  only  the  terminal  poles  — 
i.e.,  poles  on  which  aerial  or  underground  cable  terminals  are  located  — 
are  stepped.    It  is,  therefore,  usually  advisable  to  determine  a  separate 
unit  cost  for  stepping  poles,  and  not  to  include  the  cost  of  stepping  as  a 
part  of  the  pole  unit  costs.    Fig.  25  shows  the  derivation  of  the  unit  cost 
for  stepping  poles  of  various  sizes. 

[Galvanized  iron  steps,  $0.026  each;   wood  steps,  $0.0083  each.] 


Height  of  pole  (feet),  . 

25 

30 

35 

40 

45 

50 

55 

60 

70 

Number  of  iron  steps, 

8 

11 

14 

17 

20 

23 

26 

29 

35 

Number  of  wood  steps, 

5 

5 

5 

5 

5 

5 

5 

5 

5 

Material:  — 

Iron  steps, 

$0  208 

$0  286 

$0  364 

$0  442 

$0  520 

$0  598 

$0  676 

$0  754 

$0  910 

Wood  steps, 

042 

042 

042 

042 

042 

042 

042 

042 

042 

Nails  for  wood  steps, 

020 

020 

020 

020 

020 

020 

020 

020 

020 

Waste  and  breakage, 

005 

007 

009 

010 

Oil 

013 

015 

016 

019 

Total  material, 

$0  275 

$0  355 

$0  435 

$0  514 

$0  593 

$0  673 

$0  753 

$0  832 

$0  991 

Labor:  — 

Boring  for  steps, 

$0  10 

$0  11 

$0  14 

$0  20 

$0  28 

$0  37 

SO  48 

$0  60 

$0  75 

Attaching  steps, 

09 

12 

15 

18 

21 

24 

27 

30 

35 

Supervision,  15  per  cent, 

03 

03 

04 

06 

07 

09 

11 

14 

17 

Total  labor,  . 

$0  22 

$0  26 

$0  33 

$0  44 

$0  56 

$0  70 

$0  86 

$1  04 

$1  27 

Total  cost,     . 

$0  495 

$0  615 

$0  765 

$0  954 

$1  153 

$1  373 

$1  613 

$1  872 

$2  261 

FIG.  25.  —  Cost  of  stepping  poles. 


120        TELEPHONE  RATES  AND  VALUES 

225.  Unit  Costs  for  Anchors  and  Guys.  —  In  the  discussion  of  the 
unit  costs  for  the  poles  and  cross  arms,  emphasis  was  laid  upon  the  fact 
that  all  material  and  labor  costs,  as  of  the  appraisal  date  and  for  the 
several  years  preceding  the  appraisal,  should  be  carefully  reviewed  before 
the  adoption  of  final  figures  for  use  in  building  up  the  unit  costs.  This  is 
equally  necessary  in  the  case  of  the  unit  costs  for  the  anchors  and  guys, 
and  for  all  of  the  unit  costs  for  outside  plant  construction  treated  here- 
inafter. If  the  reader  will  bear  this  suggestion  in  mind,  it  will  not  be 
necessary  to  refer  to  it  specifically  in  the  case  of  the  individual  unit  costs. 

All  of  the  unit  cost  calculations  given  in  the  ensuing  paragraphs  are 
based  on  the  premises  that  all  material  and  labor  costs  used  in  building 
up  the  units  have  been  subjected  to  careful  analysis  by  the  appraisal 
engineer.  Figs.  26  and  27  show  the  method  of  building  up  unit  costs  for 
anchors  and  guys,  respectively. 

1  Patent  anchor,  5-inch  at  $0.8500,      ...  $0  850 

2  guy  hooks  at  $0.0590 118 

1  Crosby  clip  at  $0.1550,    . 

1  2-bolt  clamp  at  $0.1760,  ...  176 

10  pole  shims  at  $0.0230 230 

1  |-inch  thimble  at  $0.0345,        ....  035 

2  fetter-drive  screws,  Hnch  by  4-inch,  at  $0.0250,         .  050 
20-foot  |-inch  S.  &  M.  strand  at  $0.0110,     .          .  220 
20-foot  No.  6  B.  B.  iron  wire  at  $0.0039, 078 


Total,         ....  .       $1  912 

Add  2  per  cent  loss  and  waste,    . 

Total  material,  ....  $1  950 

Labor,  placing  rod,    . 
Labor,  placing  guy,   .  .  . 

Field  supervision  and  teaming,    . 

Total  labor,  .       $2  588 


Unit  cost,          .  .       $4  54 

FIG.  26.  —  Unit  cost  of  light  patent  anchor  (rural). 


UNIT  COSTS  FOR  POLE  LINES  121 

75-foot  ^-mch  S.  &  M.  strand  at  $0.0132 $0  990 

50-foot  f-irich  S.  &  M.  strand  at  $0.0110, 550 

2  guy  hooks  at  $0.0590, 118 

2  fetter-drive  screws,  £-inch  by  4-inch  at  $0.0250,           ....  050 

10  pole  shims  at  $0.0230, 230 

2  Crosby  clips  at  $0.1550, ...                    310 

2  2-bolt  clamps  at  $0.1760 352 


Total,         .  .  .  .  ...       $2  600 

Add  2  per  cent  loss  and  waste,    ........  052 


Total  material,  ...  .  $2  652 

Labor,  placing  guy,   .          .          .          .          .          .          .          .         $2  500 

Field  supervision  and  teaming,   ......  300 


Total  labor,         .  .          .  ...       $2  800 

Unit  cost, $5  45 

FIG.  27.  —  Unit  cost  of  head  guys  (city  and  rural). 


CHAPTER  XIV 
UNIT  COSTS  FOR  THE  AERIAL  CABLE  PLANT 

226.  Aerial  Cable  Plant,  Unit  Costs.  —  The  aerial  cable  account,  as 
has  been  previously  stated,  includes  cost  of  cables,  suspension  strand  wire, 
cable  clips  and  rings,  cable  boxes  and  fittings,  pole  seats  or  platforms, 
loading  coils,  potheads,  protectors,  sleeves,  and  all  other  material  used  in 
connection  with  the  installation  of  aerial  cable. 

The  cost  of  Exchange  Aerial  Cable,  Account  242,  will  necessarily  be 
slightly  lower  than  the  cost  of  Toll  Aerial  Cable,  Account  252.  This  is  due 
to  the  fact  that  the  installation  of  exchange  plant,  as  already  suggested, 
can  usually  be  effected  more  economically  than  the  installation  of  the  toll 
plant  because  of  lower  labor  and  cartage  costs,  and  lower  material  prices. 

The  determination  of  the  unit  costs  for  use  in  the  appraisal  of  a  telephone 
aerial  cable  plant  should  be  prefaced  by  a  careful  review  of  material  and 
labor  prices  for  the  several  years  preceding  the  appraisal.  Given  repre- 
sentative material  prices,  it  is  a  comparatively  easy  matter  to  build  up 
the  unit  costs  for  each  of  the  various  types  of  equipment  falling  under  the 
aerial  cable  accounts. 

227.  Unit  Cost  per  Foot  of  Aerial  Cable  in  Place.  —  Fig.  28  shows 
an  analysis  of  the  total  cost  per  foot  of  placing  aerial  cable  in  metal  hangers, 
exclusive  of  the  messenger  strand  from  which  the  cable  itself  is  suspended. 
It  will  be  noted  that  the  costs  per  foot  in  place,  as  given  in  this  table,  are 
computed  by  first  estimating  what  it  would  cost  to  place  a  1,000-foot 
section  of  each  of  the  various  sizes  of  cable  under  consideration,  and  sub- 
sequently reducing  these  costs  per  1,000-foot  section  to  a  cost  per  foot 
basis. 

228.  Basis  of  Prices  for  Unit  Costs. —  There  is  one  point  which 
merits  the  most  careful  consideration  in  the  preparation  of  unit  costs  for 
cable,  or  for  any  other  type  of  equipment  composed  largely  of  copper,  lead 
and  the  other  higher-priced  metals:  it  is  that  the  present  material  prices 
are  far  above  anything  that  has  been  experienced  during  the  brief  history 
of  public  utility  appraisement  work. 

The  costs  given  in  Fig.  28  were  built  up  several  years  ago,  and  ob- 
viously they  are  far  below  present  costs.  Up  to  a  comparatively  short 
time  ago  the  majority  of  appraisal  engineers  considered  present-day  metal 
prices  abnormal,  and  therefore  unfair  for  use  in  the  determination  of  the 
reproduction  cost  of  utility  properties. 


UNIT  COSTS  FOR  THE  AERIAL  CABLE  PLANT       123 


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TELEPHONE  RATES  AND  VALUES 


Since  the  advent  of  the  United  States  into  the  world  war,  however, 
there  are  many  who  think  that  costs,  as  of  to-day,  are  not  unduly  high 
for  use  in  appraisement  work,  in  view  of  the  fact  that  the  metal  market 
will  probably  continue  to  increase  —  at  least  to  some  extent  —  during 
the  next  few  years,  and  that  in  any  event  the  market  will  not  undergo  any 
appreciable  decrease  for  four  or  five  years  to  come.  Whether  or  not  this 
latter  viewpoint  is  justifiable  the  writer  is  not  at  present  in  a  position  to 
say. 

To  be  conservative,  however,  it  is  much  better  to  use  average  prices  for 
the  past  two,  or  perhaps  three,  years  than  to  attempt  to  predicate  the 
valuation  of  a  telephone,  or  any  other  public  utility,  property  upon  present- 
day  prices. 

229.  Factors  in  Determination  of  Unit  Costs.  —  It  may  be  well  to 
point  out  that  the  unit  costs  as  presented  in  Fig.  28,  and  in  all  of  the  other 
tables  in  the  chapters  on  unit  costs,  are  merely  given  for  illustrative  pur- 
poses, and  should  not  be  used  in  actual  appraisement  work. 

The  reason  for  this  is  obvious :  In  the  first  place,  costs  are  constantly 
varying,  due  to  changes  in  material  markets;  and  in  the  second  place, 
prices  or  unit  costs  which  may  be  perfectly  fair  in  one  locality  under  one 
set  of  conditions  may  be  most  unfair  in  another  locality  under  a  different 
set  of  conditions.  Local  labor  conditions,  the  distance  of  the  property 
under  appraisement  from  the  material  markets,  local  soil  and  climatic 
conditions,  are  all  factors  in  the  determination  of  fair  unit  costs. 

230.  Unit  Costs  of  Miscellaneous  Sizes  of  Cables.  —  It  frequently 
happens  that  the  appraiser  of  a  telephone  property  encounters  a  hetero- 


FIG.  29.  —  Material,  labor  and  total  unit  costs  for  No.  22  B.  &  S.  gage  cable. 

geneous  collection  of  sizes  and  gauges  of  cable.     This  is  especially  true 
in  the  case  of  old  plants.    It  is  practically  out  of  the  question  to  ascertain 


UNIT  COSTS  FOR  THE  AERIAL  CABLE  PLANT       125 


individual  pric.es  for  obsolete  types  of  cable,  and  it  is  therefore  suggested 
that  the  following  plan  be  adopted  in  cases  of  this  kind. 

Carefully  compute  the  cost  of  the  standard  sizes  for  each  gauge  of 
cable,  —  following  the  method  suggested  in  Fig.  28,  —  and  plat  the  results 
of  these  computations  graphically,  as  illustrated  in  Fig.  29.  The  material, 
labor  and  total  unit  costs  may  thus  be  determined  from  the  curve  with  a 
sufficient  degree  of  accuracy  for  all  ordinary  purposes. 

Fig.  29  shows  the  material,  labor  and  total  unit  costs  for  No.  22  B. 
&  S.  gauge  cable.  In  a  similar  manner  curves  may  be  platted  for  Nos. 
19,  20  and  any  other  gauges  of  cable  encountered  in  the  plant  under  con- 
sideration. Odd  or  intermediate  sizes  of  cable  may  be  read  directly  from 
the  curves. 

231.  Illustration  of  Cost  Computation  for  placing  Messenger 
Strand.  —  Fig.  30  illustrates  the  method  of  computing  the  cost  of  placing 
messenger  strand.  It  will  be  noted  that,  as  in  the  case  of  the  aerial  cable, 
the  costs  are  first  computed  on  a  basis  of  a  1-foot  section,  and  then  reduced 
to  a  unit  cost  per  foot. 


A-inch 
S.  &M.  H.S. 
Strand. 

|-inch 
S.  &M. 

Strand. 

J-inch 
S.  &M. 
Strand. 

1,000-foot  messenger  strand,       

$13  200 

$11  000 

$24  500 

10  machine  bolts,  %  inch  by  12  inches,     . 

772 

772 

772 

10  messenger  clamps,          

550 

550 

550 

2  2-bolt  clamps,          

352 

352 

352 

2  thimbles,          / 
Totals  

069 

069 

069 

$14  943 

$12  743 

$26  243 

Add  2  per  cent  loss  and  waste,          .... 
Total  material  

299 

255 

525 

$15  242 

$12  998 

$26  768 

Total  labor,          
Unit  cost  per  1,000  feet  

9  200 

9  000 

9  300 

$24  442 

$22  000 

$36  068 

Unit  cost  per  foot  

$0  024 

$0  022 

$0  036 

FIG.  30.  —  Cost  of  placing  messenger  strand. 

232.  Aerial  Cable  Terminals.  —  Fig.  31  illustrates  the  method  of 
building  up  the  cost  of  aerial  cable  terminals,  complete  and  ready  for 
installation  on  aerial  cable.  To  the  costs  as  shown  in  the  last  column  of 
this  table  should  be  added  the  cost  of  splicing  the  terminal  to  the  cable. 
•For  any  given  size  of  terminal  this  splicing  cost  will  necessarily  be  de- 
pendent upon  the  size  of  cable  to  which  it  is  to  be  attached. 

Obviously,  it  costs  less  to  splice  a  25-pair  terminal  to  a  50-pair  cable 
than  it  does  to  splice  a  25-pair  terminal  to  a  200-pair  cable.  A  separate 


126 


TELEPHONE  RATES  AND  VALUES 


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UNIT  COSTS  FOR  THE  AERIAL  CABLE  PLANT       127 


computation  of  the  cost  of  splicing  every  terminal  found  in  a  large  plant 
would  necessarily  be  an  exceedingly  tedious  and  costly  operation. 

For  all  practical  purposes  the  cost  of  splicing  terminals  may,  with  a 
sufficient  degree  of  accuracy,  be  obtained  by  determining  the  average  size 
of  cable  to  which  a  given  size  of  terminals  is  attached,  and  using  this 
average  cable  size  as  a  basis  for  estimating  a  unit  splicing  cost.  For 
instance,  if  it  is  found  that  most  of  the  25-pair  terminals  of  a  given  type 
are  spliced  to  50-pair  cables,  then  the  cost  of  joining  a  25-pair  terminal 
to  a  50-pair  cable  may  be  used  as  a  fair  index  of  the  average  splicing  cost 
for  terminals  of  the  type  under  consideration. 

This  price  will  hold  good,  even  though  an  actual  field  count  shows  that 
a  few  of  the  25-pair  terminals  are  spliced  to  25-pair  cables,  and  a  few  of 
them  to  cables  of  sizes  larger  than  50-pair.  An  example  of  the  method  of 
computing  cable  terminal  unit  costs  complete,  spliced  to  aerial  cables,  is 
shown  in  Fig.  32. 


NUMBER  OF  PAIRS. 

Type. 

Total 
Cost. 

Add  for 
Average 
Splicing. 

Unit 

Cost. 

Average 
Size  Cable 
to  which 
Leg  is 
attached. 

25  

18-C 

$15  392 

$3  950 

$19  34 

25-pair 

10  

Box 

12  130 

4  000 

16  13 

26-pair 

15  

Box 

14  964 

3  417 

18  38 

15-pair 

26  

Box 

21  206 

5  710 

26  92 

50-pair 

50  

Box 

37  821 

5  740 

43  56 

50-pair 

FIG.  32.  —  Cost  of  aerial  cable  terminals  in  place. 


CHAPTER  XV 
OUTSIDE  WIRE   COSTS 

233.  The  Aerial  Wire.  —  To  quote  the  accounting  instructions  of  the 
Interstate  Commerce  Commission,  the  cost  of  exchange  aerial  wire  "  should 
include  the  cost  of  exchange  service  wires,  including  insulators,  sleeves 
and  other  materials  used  in  attaching  such  wires  to  the  insulators.    The 
exchange  wire  includes  the  drop  wire  leading  from  overhead  plant  to 
the  point  of  entrance  to  the  building." 

Toll  aerial  wire  includes  the  cost  of  toll  service  wires,  including  in- 
sulators, sleeves  and  other  materials  used  in  attaching  such  wires  to  insula- 
tors. Exchange  aerial  wire,  it  will  be  remembered,  is  chargeable  to  the 
243  account,  and  the  toll  aerial  wire  to  the  253  account,  under  the  pro- 
visions of  the  Interstate  Commerce  Commission's  instructions  for  tele- 
phone accounting. 

234.  Classification  of  Aerial  Wire  Unit  Costs.  —  Aerial  wire  unit 
costs  may  be  divided  into  two  general  classifications,  —  first,  exchange 
wire;  and  second,  toll  wire. 

Exchange  wire  may  be  again  subdivided  into  exchange  line  wire  and 
exchange  drop  wire.  In  so  far  as  the  unit  costs  are  concerned,  that  portion 
of  the  exchange  line  wire  which  extends  into  the  rural  districts  may  be 
considered  under  the  head  of  toll  aerial  wire.  The  reason  for  this  will 
be  apparent  when  it  is  remembered  that  rural  lines  and  toll  lines  are  usually 
subject  to  the  same  construction  difficulties,  due  to  the  fact  that  the 
base  of  supplies  is  more  distant  than  in  the  case  of  city  construction. 
Both  toll  and  rural  aerial  wire  costs  run  a  little  higher  than  the  correspond- 
ing city  wire  costs. 

235.  Unit  Cost  of  Aerial  Wire.  —  Considering  first  the  exchange 
line  wire,  Fig.  33  shows  an  analysis  of  the  cost  per  wire  mile  of  various 
sizes  of  bare  and  insulated  iron  wire  placed  in  the  city.    It  will  be  noted 
that  in  addition  to  the  wire  itself,  the  cost  of  the  insulators,  tie  wires  and 
sleeves  are  included  as  a  part  of  the  line-wire  unit  cost. 


OUTSIDE  WIRE  COSTS 


129 


No.  12 
B.  W.  G. 
Bare  Iron. 

No.  10 
B.  &S.  G. 
C.  C. 

Steel. 

No.  14 
B.  W.  G. 
D.  B.  W.  P. 
Iron. 

No.  12 
B.  W.  G. 
D.  B.  W.  P. 
Iron. 

1  mile  wire,        ...... 

$6  375 

$26  719 

$14  250 

$18  400 

48  pony  insulators,     .         .         .         . 

744 

744 

744 

744 

48  tie  wires,        

039 

166 

108 

115 

Sleeves,       

101 

066 

068 

070 

Total  

$7  259 

$27  695 

$15  170 

$19  329 

Add  2  per  cent  loss  and  waste, 

145 

554 

303 

387 

Total  material,    

$7  404 

$28  249 

$15  473 

$19  716 

Stringing  and  tying,          .... 

$4  750 

$4  750 

$8  000 

$10  000 

Teaming,   

500 

500 

750 

1  000 

Trimming  

438 

438 

438 

438 

Supervision,       

853 

853 

1  378 

1  716 

Total  labor  

$6  541 

$6  541 

$10  566 

$13  154 

Unit  cost,  

$13  945 

$34  790 

$26  039 

$32  870 

FIG.  33.  —  City  line  wire  costs. 


It  often  happens  that  No.  17  B.  &  S.  gauge,  copper-clad,  steel  twisted- 
pair wire  is  used  in  city  construction  in  the  place  of  bare  line  wire.  An 
analysis  of  the  cost  per  1,000  feet  of  No.  17  B.  &  S.  copper-clad,  twisted- 
pair steel  line  wire  is  given  in  Fig.  34. 


1,000  feet  No.  17  C.  C.  steel  twisted-pair  wire  at  $0.00875,    . 
10  pony  insulators  at  $0.0155,     ...... 
10  No.  17  C.  C.  tie  wires,  8  inches,      . 
Tape  and  solder,        .... 

Total,         
Add  2  per  cent  loss  and  waste,    ...... 

Total  material,  ........ 
Labor,  stringing,        .          .          .'•,". 
Teaming,           ........ 
Trimming,         ........ 
Supervision,      ......... 

• 

$8  750 
155 
061 
050 

• 

$9  016 
180 

$3  250 
750 
083 
612 

$9  196 

Total  labor,        .          .          .          . 

Total  cost  per  1,000  feet 

FIG.  34.  —  City  copper-clad  line  wire. 


130 


TELEPHONE  RATES  AND  VALUES 


Where  the  number  of  wires  involved  is  appreciable,  it  is  sometimes 
necessary  to  run  the  wires  in  what  is  frequently  known  as  "Lock  aerial," 
or  "  aerial  conduit."  The  cost  per  foot  of  aerial  conduit  construction  is 
shown  in  Fig.  35.  In  this  table  it  will  be  noticed  that  1,100  feet  of  strand 

1,100-foot  f-inch  S.  &  M.  strand  at  $0.011,  .... 

10  machine  bolts  at  $0.077, 

10  messenger  clamps  at  $0.055,  ....... 

500  Cameron  rings  at  $0.008, 


Total,         . 
Add  2  per  cent  loss  and  waste,    . 

Total  material,  . 
Labor  installing, 
Teaming,  .... 

Supervision,      .... 


.  $17  420 
348 

.  $17  768 
$11  000 
1  000 
1  800 


Total  labor 13  800 


Unit  cost  per  1,000  feet, 
Unit  cost  per  foot, 


.  $31  568 
.     $0  0316 


FIG.  35.  —  Cost  of  Lock  aerial  conduit. 


are  utilized,  and  no  deduction  is  made  in  making  the  unit  cost  per  1,000 
feet.  The  extra  100  feet  of  strand  are  used  for  dead-ending  purposes  in 
putting  up  the  1,000  feet  of  the  Lock  aerial  conduit. 

236.  Drop  Wire  Unit  Costs.  —  An  analysis  of  the  cost  of  placing 
single  iron  wire  drops,  of  various  gauges  and  types,  in  the  city  is  given  in 
Fig.  36.  The  first  column  shows  the  cost  of  placing  a  bare  iron  wire  drop; 


No.  12 
Bare  Iron. 

No.  12 
Bare  and 
No.  14 
D.  B.  W.  P. 

No.  14 
D.  B.  W.  P. 
Iron. 

164  feet  wire:  — 

82  feet  bare,    

$0  099 

$0  099 

$0  221 

82  feet  D.  B.  W.  P.  

099 

221 

221 

2  porcelain  knobs,      

019 

019 

019 

Miscellaneous,    

020 

020 

020 

Total  

$0  237 

$0  359 

$0  481 

Add  2  per  cent  loss  and  waste,          .... 

005 

007 

010 

Total  material,     

$0  242 

$0  366 

$0  491 

Total  labor  

1  750 

1  750 

1  750 

$1  992 

$2  116 

$2  241 

FIG.  36.  —  Cost  of  placing  city  single  iron  wire  drops. 


OUTSIDE  WIRE  COSTS 


131 


the  second  column  the  cost  of  placing  a  mixed  iron  wire  drop,  one  bare 
and  one  insulated  wire;  while  the  third  column  gives  the  cost  of  placing 
drops  consisting  of  two  insulated  single  wires.  The  cost  of  placing  No. 
16  "Ironite"  and  No.  17  copper-clad,  steel  twisted-pair  drops  in  the  city 
is  given  in  Fig.  37.  Figs.  38  and  39,  respectively,  show  the  cost  of  placing 
single  wire  and  twisted-pair  drops  in  rural  districts. 


No.  16  Ironite 
Twisted  Pair. 

No.  17  C.  C. 

Steel 
Twisted  Pair. 

90-foot  wire  (circuit  feet),  

$0  540 
010 

$0  788 
010 

Miscellaneous,      

020 

020 

Total 

$0  570 

$0  818 

Add  2  per  cent  loss  and  waste,  

Oil 

016 

Total  material,     
Total  labor  

$0  581 
1  600 

$0  834 
1  600 

Unit  cost,      

$2  181 

$2  434 

FIG.  37.  —  Cost  of  placing  city  twisted-pair  drops. 


No.  12 
Bare  Iron. 

No.  12 
Bare  and 
No.  14 
D.  B.  W.  P. 

No.  14 
D.  B.  W.  P. 

Iron. 

218  feet  wire:  — 

109  feet  

$0  132 

$0  132 

$0  294 

109  feet  

132 

294 

292 

1.6  wood  bracket,       .         .         . 

023 

023 

023 

2.5  porcelain  knobs,  

024 

024 

024 

Miscellaneous,     .         

015 

015 

'  015 

Total  

$0  326 

$0  488 

$0  650 

Add  2  per  cent  loss  and  waste,          .... 

007 

010 

013 

Total  material,    

$0  333 

$0  498 

$0  663 

Total  labor  

2  000 

2  000 

2  000 

Unit  cost  

$2  333 

$2  498 

$2  663 

FIG.  38.  —  Rural  single  iron  wire  drops. 


132 


TELEPHONE  RATES  AND  VALUES 


109-foot  wire  (circuit  feet), 
1.6  wood  brackets,     . 
2.5  porcelain  knobs, 
Miscellaneous, 

Total,         . 
Add  2  per  cent  loss  and  waste,    . 

Total  material,  . 
Total  labor, 


Unit  cost, 


No.  17  C.  C.  Steel 
Twisted  Pair. 


$1   036 
1  750 

$2  786 


FIG.  39.  —  Rural  twisted-pair  drops. 


237.  Rural  and  Toll  Line  Wire  Unit  Costs.  —  An  analysis  of  the 
cost  of  placing  various  gauges  of  bare  and  insulated  toll  and  rural  single 
line  wire  is  presented  in  Fig.  40.  Fig.  41  shows  the  cost  per  1,000  feet  of 


No.  9 
B.  W.  G. 

No.  10 
B.  W.  G. 

No.  12 
B.  W.  G. 

No.  10 
B.  &  S.  G. 
C  C. 

No.  14 
B.  W.  G. 
D  P  W  P 

Bare  Iron. 

Bare  Iron. 

Bare  Iron. 

Steel. 

Iron. 

1  mile  wire,     .... 

$10  980 

$9  352 

$6  375 

$26  719 

$14  250 

32  pony  insulators, 

496 

496 

496 

496 

496 

32  tie  wires,    .... 

027 

027 

027 

111 

070 

Sleeves,    

135 

107 

068 

066 

068 

Total 

$11  638 

$9  982 

$6  966 

$27  392 

$14  884 

Add  2  per  cent  loss  and  waste,  . 

233 

200 

139 

548 

298 

Total  material, 

$11  871 

$10  182 

$7  105 

$27  940 

$15  182 

Stringing  and  tying,  . 

$5  000 

$4  750 

$4  500 

$4  500 

$8  000 

Teaming  

650 

500 

350 

350 

750 

Supervision,    .... 

850 

787 

727 

727 

1  250 

Total  labor  

$6  500 

$6  037 

$5  577 

$5  577 

$10  000 

Unit  cost  per  mile, 

$18  371 

$16  219 

$12  682 

$33  517 

$25  182 

FIG.  40.  —  Cost  of  placing  toll  and  rural  line  wire. 


OUTSIDE  WIRE  COSTS  133 

1,000  feet  No.  17  copper-clad  steel  twisted-pair  wire  at  $0.00875,    .          .  $8  750 

]0  pony  insulators  at  $0.0 155 155 

10  No.  17  C.  C.  tie  wires,  8  inches, 061 

Tape  and  solder, 050 


Total,         .  .     $9  016 

Add  2  per  cent  loss  and  waste,    ........  180 


Total  material,  .  .  .     $9  196 

Labor,  stringing,        .      •    .  .  .  .  .  .  $3  250 

Teaming, 750 

Supervision,      .........  600 


Total  labor,         .  4  60 


Total  cost  per  1,000  feet,     .                                                                        .  $13  796 
Unit  cost  per  foot, $0  0138 

FIG.  41.  —  Copper-clad  twisted-pair  wire  in  toll  and  rural  plant. 


placing  No.  17  copper-clad,  twisted-pair  wire  in  the  toll  and  rural  plant. 
An  analysis  of  the  cost  per  mile  of  placing  No.  12  N.  B.  S.  gauge  copper 
wire  in  the  toll  and  rural  plant  is  given  in  Fig.  42. 

1  mile  No.  12  N.  B.  S.  copper  wire, $27  94 

35  pony  insulators  at  $0.01496 524 

35  No.  12  tie  wires,  8  inches 122 

3  No.  12  sleeves  at  $0.02,  .  06 


Total,         .          .          . .     $28  646 

Add  2  per  cent  loss  and  waste,    ........  574 


Total  material,  .  .     $29  22 

Labor,  stringing  and  tying  in,     .  .  .  .  .  .  $4  00 

Teaming,  .........  35 

Supervision,      .........  65 


Total  labor, 5  00 


Total  cost  per  wire  mile,      .  .     $34  22 

FIG.  42.  —  No.  12  copper  wire  in  toll  and  rural  plant. 

238.  Basis  of  Material  Prices  for  Unit  Cost  Determinations.  — 

The  cost  analyses  as  given  in  the  foregoing  tables  are  all  predicated  on  a 
prior  determination  of  fair  material  costs  as  of  the  appraisal  date.  In 
other  words,  the  cost  of  wire,  insulators  and  all  of  the  auxiliary  equipment, 
as  included  in  the  unit  cost  derivation,  is  based  upon  a  careful  investigation 
of  material  prices  over  a  period  of  several  years  prior  to  the  date  of  ap- 
praisal. 


134        TELEPHONE  RATES  AND  VALUES 

It  should  be  remembered  that  the  figures  quoted  in  these  analyses  are 
merely  given  for  the  purpose  of  illustration.  As  has  been  previously 
stated,  it  is  impossible  to  give  unit  costs  which  will  be  applicable  to  the 
individual  requirements  of  readers,  due  to  the  fact  that  material  and 
labor  prices  are  constantly  changing,  and  also  to  differences  in  local  con- 
struction conditions. 


CHAPTER  XVI 
CONDUIT  COSTS 

239.  Underground  Conduit  Construction.  —  The  Interstate  Com- 
merce Commission's  accounting  system  prescribes  that   "the  cost  of 
service  conduits,  including  cost  of  pipe,  cement,  manholes  and  all  other 
materials  used,  the  cost  of  connecting  to  poles  and  buildings,  repaying 
and  other  costs  incident  to  the  installation  of  such  conduits,"  shall  be 
charged  to  the  underground  conduit  accounts.    The  exchange  construction 
is  chargeable  to  account  244,  and  toll  construction  to  account  254. 

Underground  conduit  unit  costs  are  among  the  most  important  involved 
in  the  appraisement  of  a  telephone  property.  The  truth  of  this  statement 
will  be  appreciated  when  it  is  realized  that  the  cost  of  main  conduit  con- 
struction may  run  as  high  as  $4  or  $5  per  lineal  foot  of  conduit,  exclusive 
of  repaving  costs. 

Manholes  cost  all  the  way  from  $25  or  $30  for  a  small  hand  box  on  an 
unpaved  street  to  $4,000  or  $5,000  for  a  large  manhole  in  the  center  of  a 
large  city.  In  one  of  our  largest  cities  the  Bell  company  has  a  manhole 
located  at  the  intersection  of  two  of  the  busiest  streets,  which,  it  is  claimed, 
cost  in  the  neighborhood  of  $5,000. 

It  is  hardly  necessary  to  state  that  the  high  cost  of  this  particular  man- 
hole was  not  due  to  its  size  or  to  the  material  used  in  its  construction. 
The  incidental  expenditures  involved  in  the  avoidance  of  the  pipes  and 
conduits  of  other  companies  located  in  this  congested  district,  and  in 
carrying  on  the  construction  work  without  interrupting  the  city  traffic, 
were  responsible  for  the  enormous  cost  of  this  particular  manhole. 

240.  Divisions  of  Conduit  Unit  Costs.  —  Underground  conduit  unit 
costs  may  be  divided  into  three  general  subdivisions :  — 

1.  Main  conduit  —  conduit  between  manholes. 

2.  Lateral  conduit  —  branch  conduit  to  poles  or  buildings. 

3.  Manholes. 

241.  Main  Conduit  Unit  Costs.  —  In  Fig.  43  is  presented  a  rather 
complete  analysis  of  the  cost  of  placing  various  types  and  sizes  of  main 
(tile)  conduit.    All  these  costs  are  exclusive  of  -the  costs  of  manholes  and 
of  replacing  the  pavement  over  the  subway.    They  are  based  upon  a 
complete  concrete  envelope. 


136 


TELEPHONE  RATES  AND  VALUES 


ii 

Sfe 

!& 

i! 

n 
^JL 

1 

'"$ 

-d 

1 

i 

I 

NUMBER  OF 
DUCTS. 

ubic  Yards  Ex 
on  per  Trench 

l«^ 

$ 

£  I 

.S-b  § 

•§SS 

ost  Tile  and  M 
laneous  Materii 
Trench  Foot. 

ost  excavating 
backfilling  and 
ing  Excess  Din 

ost  Concrete  in 

L 

%£ 
'&.s 

II 

1| 
•3  3 

£    88 
^ 

II 

otal  per  Trench 

MH 

I 
Q 

! 
1 

U'5 

o 

0 

0 

0 

J^ 

£  ° 

H 

H 

2  

0  16 

0  04 

$0  08 

$0  16 

$0  24 

$0  02 

$0  02 

9 

$0  52 

10 

$0  26 

4  

20 

05 

16 

20 

30 

04 

04 

74 

185 

6,    . 

21 

06 

24 

21 

36 

06 

06 

93 

155 

10  

26 

07 

40 

26 

42 

10 

10 

1  28 

128 

16  

32 

08 

64 

32 

48 

16 

16 

1  76 

11 

20  

32 

08 

80 

32 

48 

20 

20 

2  00 

10 

28,  .         .         .         . 

40 

09 

1  12 

40 

54 

28 

28 

2  62 

094 

40,  .         .         . 

51 

10 

1  60 

51 

60 

40 

40 

3  51 

088 

Col.  4:  Tile  and  miscellaneous  material,  4  cents  per  duct  foot. 

Col.  5:  Excavating,  backfilling  and  hauling  excess  dirt  at  $1  per  cubic  yard  of  excavation. 

Col.  6:  Concrete  and  mortar  in  place,  $6  per  cubic  yard. 

Col.  7:  Labor,  distributing  and  laying  tile  at  1  cent  per  duct  foot. 

Col.  8:  Hauling  tile  and  concrete  material  at  1  cent  per  duct  foot. 


FIG.  43.  —  Analysis  of  subway  costs,  exclusive  of  manholes  and  repaving. 

242.  Unit  Costs  of  Lateral  Conduits.  —  The  unit  costs  for  lateral 
conduits  are  built  up  in  the  same  manner  as  those  for  main  conduit,  but 
as  a  rule  they  run  a  little  higher.  Lateral  conduits  do  not  usually  exceed 
three  ducts  in  size. 

In  addition  to  the  cost  of  the  lateral  conduit  between  the  manhole  and 
the  pole  there  is  also  the  cost  of  providing  terminal  facilities  at  the  pole. 
Lateral  conduits  usually  terminate  in  what  are  known  in  telephone  par- 
lance as  "risers."  The  cost  of  risers  of  various  types  is  shown  in  Fig.  44. 


Length  of  Riser 
(in  Feet). 

3-inch  Pipe 
Bends. 

Vertical  Pipe. 

Labor. 

Total  Cost. 

- 

$3  15 

- 

$0  50 

$3  65 

5 

3  15 

$1  10 

1  00 

5  25 

10 

3  15 

2  20 

1  50 

6  85 

15 

3  15 

3  30 

1  75 

8  20 

20 

3  15 

4  40 

2  00 

9  55 

25 

3  15 

5  50 

2  25 

10  90 

3-inch  iron  pipe, 
3-inch  bends,      . 


$0  22  per  foot , 
3  15  each. 


FIG.  44.  —  Cost  of  lateral  risers. 


CONDUIT  COSTS  137 

243.  Manholes  and  their  Costs.  —  There  are  two  general  types  of 
manholes  used  in  telephone  work,  —  brick  manholes  and  concrete  man- 
holes. 

In  a  recent  valuation  of  the  property  of  the  Chicago  Telephone  Com- 
pany a  unique  system  of  estimating  manhole  costs  was  evolved. 

This  method  consists  of  estimating  a  base  charge  which  includes  the 
cost  of  manhole  covers  and  other  similar  costs  common  to  manholes  of 
various  sizes.  To  this  base  charge  is  added  an  allowance  for  the  cost  of 
the  manhole  itself,  based  upon  its  cubic  contents. 

In  a  recent  telephone  appraisal  where  this  method  of  estimating  man- 
hole costs  was  employed,  a  base  charge  of  $20  was  used,  and  to  this  base 
charge  was  added  an  allowance  of  25  cents  per  cubic  foot  excavated.  In 
other  words,  the  contents  of  the  manhole  excavation  was  computed  and 
appraised  at  25  cents  per  cubic  foot,  and  to  the  result  thus  obtained  an 
additional  charge  of  $20  was  added  to  cover  the  cost  of  placing  the  casting, 
etc. 

This  method  may  be  modified  into  a  more  convenient  form  by  applying 
a  unit  cost  per  cubic  foot,  based  on  the  interior  dimensions  of  the  manhole. 
These  dimensions  would  consist  of  the  average  length  at  the  inside  of  the 
manhole,  the  average  width,  and  the  distance  from  the  bottom  of  the 
manhole  to  the  street  level. 

It  is  obvious  that  if  this  cubic-contents  method  is  employed  in  the 
appraisement  of  telephone  manholes,  it  is  most  important  that  both  the 
base  charge  and  the  cost  per  cubic  foot  be  carefully  checked  in  order  to 
make  sure  that  they  meet  the  individual  requirements  of  the  case  in  hand. 
This  may  be  readily  accomplished  by  computing  the  actual  cost  of  several 
typical  manholes  in  the  plant  under  appraisement,  and  varying  the  base 
charge  and  the  cost  per  cubic  foot  until  they  meet  the  requirements  of 
the  case. 

244.  Repaying  Costs.  —  The  cost  of  repaving  over  main  conduit, 
lateral  conduit  and  manholes  is  an  appreciable  item  in  the  appraisal  of 
telephone  properties. 

Paving  costs  are  almost  entirely  dependent  upon  local  conditions.  It 
is  therefore  out  of  the  question  to  attempt  to  give  actual  figures  in  a 
general  discussion  of  this  subject.  Suffice  it  to  say  that  the  local  charges 
for  replacing  pavement  of  various  types  should  be  carefully  checked  by 
the  appraisal  engineer.  Subsequently  the  total  amount  of  pavement  dis- 
placed, of  each  type,  should  be  carefully  computed  and  appraised  at 
whatever  costs  the  appraisal  engineer  may  deem  fair  for  the  locality 
under  consideration. 


CHAPTER  XVII 
UNDERGROUND  CABLE  UNIT  COSTS 

245.  What   Underground   Cable   Accounts    cover.  —  Under   the 
provisions  of  the  Interstate  Commerce  Commission's  uniform  accounting 
system,  the  underground  cable  accounts  should  cover  "the  cost  of  service 
underground  cables,  including  cable  boxes  and  fittings,  loading  coils  and 
other  materials  used  in  the  work  of  installing  such  cables,  and  all  of  the 
costs  incidental  thereto." 

These  accounts  should  also  include,  in  addition  to  the  main  exchange 
underground  cable,  the  subsidiary  or  lateral  cables  extending  from  man- 
holes to  poles  or  buildings;  the  interior  block  cables  (cables  within  city 
blocks);  building  or  house  cables;  and  the  cables  used  in  terminating 
exchange  and  toll  feeder  cables  within  the  central  office. 

246.  Major  Subdivisions  of  Underground  Cables.  —  There  are, 
then,  five  major  subdivisions  under  which  the  subject  of  underground 
cable  unit  costs  should  be  considered.    They  are :  — 

1.  Underground  cable  proper  —  exchange  or  toll  cables  in  main  conduit. 

2.  Subsidiary  cable  —  branch  cables  from  manholes  to  poles  or  build- 
ings. 

3.  Interior  block  cables  —  cables  along  the  rear  walls  or  fences  of  city 
blocks. 

4.  House  cables  —  distribution  cables  within  buildings. 

5.  Central  office  terminating  cables  —  silk  and  cotton  or  wool  insulated 
cables  used  to  terminate  the  exchange  and  toll  underground  cable  on  the 
main  frame  at  the  central  office. 

247.  The  Underground  Cable  Proper.  —  Taking  up  these  five  sub- 
divisions in  the  order  of  their  importance  from  the  cost  standpoint  we 
have,  first,  the  underground  cable  proper. 

The  same  general  plan  should  be  followed  in  building  up  the  unit  costs 
essential  to  the  appraisement  of  the  underground  cable  system,  as  has 
been  outlined  in  Chapter  XIV  on  aerial  cable  costs.  In  other  words,  a 
careful  analysis  of  material  and  labor  costs  for  a  period  of  several  years 
preceding  the  appraisal  should  first  be  made,  and  this  analysis  used  as  a 
basis  for  determining  fair  reproduction  costs  as  of  the  appraisal  date. 


UNDERGROUND  CABLE  UNIT  COSTS 


139 


3 

1 

8 

J3  "3 

1. 

J3 

M 

."3 

H 

G~ 

3a 

GAUGE. 

I 

=4 
6| 

1 

M 

q 

G° 
M 

T3 

9 

M 

G 

ih- 
J&3 

II 

e 

1 

"o 

1 

<M 

1 

I 

1 

IS 

a—1 

GO 

s 

—  '  a  tn 

03  3  o 

-gtCPH 

11 

o« 

No.  22,   . 

25 

$1  013 

$0  020 

$1  03 

$2  65 

$4  50 

$4  75 

$1  50 

$15  41 

$16  44 

50 

1  233 

025 

1  28 

2  65 

5  07 

5  82 

1  56 

17  37 

18  65 

75 

1  453 

029 

1  48 

2  65 

5  55 

6  70 

1  60 

19  98 

20  46 

100 

1  622 

032 

1  65 

2  65 

6  00 

7  50 

1  65 

20  47 

22  12 

150 

1  747 

035 

1  78 

2  65 

6  67 

8  90 

1  73 

22  94 

24  72 

200 

1  981 

039 

2  02 

2  65 

7  20 

10  00 

1  80 

24  80 

26  82 

400 

2  274 

046 

2  32 

2  65 

9  00 

12  50 

2  00 

30  07 

32  39 

No.  19,   . 

25 

1  026 

021 

1  05 

2  65 

5  15 

.  5  46 

1  64 

17  14 

18  19 

50 

1  258 

025 

1  28 

2  65 

5  70 

6  69 

1  70 

19  25 

20  53 

75 

1  491 

029 

1  52 

2  65 

6  22 

7  71 

1  74 

21  07 

22  59 

100 

1  672 

033 

1  71 

2  65 

6  62 

8  63 

1  79 

22  64 

24  35 

125 

1  747 

035 

1  78 

2  65 

7  05 

9  48 

1  83 

24  16 

25  94 

150 

1  822 

036 

1  86 

2  65 

7  40 

10  24 

1  87 

25  48 

27  34 

175 

2  003 

040 

2  04 

2  65 

7  72 

10  90 

1  90 

26  65 

28  69 

200 

2  081 

042 

2  12 

2  65 

8  05 

11  00 

1  93 

27  17 

29  29 

FIG.  45.  —  Costs  of  placing  underground  cable,  325-foot  sections. 


Fig.  45  presents  an  analysis  of  the  labor  and  splicing  material  costs 
incidental  to  the  placing  of  various  sizes  of  Nos.  19  and  22  gauge  under- 
ground cable.  It  will  be  noted  that  the  various  items  of  labor  costs,  such 
as  rodding,  pulling-in,  splicing,  testing  and  teaming,  are  estimated  sepa- 
rately. These,  together  with  the  allowance  for  field  supervision  and  the 
cost  of  the  splicing  material,  make  up  the  total  cost  of  placing  the 
cable. 

In  Fig.  46  the  costs  derived  in  Fig.  45  have  been  added  to  the  cost  of 
the  cable  itself  to  build  up  a  total  cost  per  foot,  as  shown  in  the  last  column 
of  table. 


140 


TELEPHONE  RATES  AND  VALUES 


GAUGE. 

g 

m 

1 
1 

3 

J2 

I 

1* 

Miscellaneous  Ma-  [I 
terial  Section. 

Miscellaneous  Mate-  1 
rial  per  1,000  Feet.  1 

Labor  per  Section. 

Labor  per  1,000  Feet.  II 

| 

b 

a 

| 

Total  Cost  per  Foot.  1 

No.  22,  . 

25 

$0  088 

$88  00 

$1  03 

$3  17 

$15  41 

$47  50 

$138  67 

$0  139 

50 

135 

135  00 

1  28 

3  94 

17  37 

53  40 

192  34 

192 

75 

175 

175  00 

1  48 

4  56 

18  98 

58  40 

237  96 

238 

100 

217 

217  00 

1  65 

5  09 

20  47 

63  05 

285  14 

285 

150 

293 

293  00 

1  78 

5  49 

22  94 

70  66 

369  15 

369 

175 

330 

330  00 

- 

- 

- 

- 

- 

- 

200 

416 

416  00 

2  02 

6  23 

24  80 

76  38 

498  61 

499 

400 

700 

700  00 

2  32 

7  15 

30  07 

92  62 

799  77 

800 

No.  19,  . 

25 

113 

113  00 

1  05 

3  23 

17  14 

52  79 

169  02 

169 

50 

199 

199  00 

1  28 

3  94 

19  25 

59  29 

262  23 

262 

75 

271 

271  00 

1  52 

4  68 

21  07 

64  90 

340  58 

341 

100 

369 

369  00 

1  71 

5  27 

22  64 

69  73 

444  00 

444 

125 

444 

444  00 

1  78 

5  49 

24  16 

74  41 

523  90 

524 

150 

505 

505  00 

1  86 

5  73 

25  48 

78  48 

589  21 

589 

175 

571 

571  00 

2  04 

6  28 

26  65 

82  08 

659  36 

659 

200 

636 

636  00 

2  12 

6  53 

27  17 

83  68 

726  21 

726 

No.  22,  . 

25D.W 

102 

102  00 

1  03 

3  17 

15  41 

47f50 

152  67 

153 

Section  lengths  =  325  feet.    One  splice  for  each  section. 


FIG.  46.  —  Unit  costs  of  underground  cable  installed. 

It  will  be  noted  that  both  tables  are  based  upon  a  325-foot  section  of 
length.  In  other  words,  in  the  appraisal  from  which  the  unit  costs  shown 
in  Fig.  45  and  Fig.  46  were  taken,  it  was  found  that  the  average  distance 
between  manholes  was  325  feet.  In  Fig.  46,  for  purposes  of  convenience, 
the  various  items  of  cost  have  also  been  expressed  in  terms  of  cost  per 
thousand  feet,  —  practically  three  section  lengths,  —  and  finally  reduced 
to  a  cost  per  foot. 

In  these  illustrations  it  has  been  assumed  that  there  will  be  one  splice 
to  each  section  for  every  size  of  cable.  In  some  cases  these  splices  will 
merely  consist  of  a  straight  splice  between  two  cables  of  the  same  size  and 
gauge,  and  without  branches.  In  other  cases  the  size  of  the  main  cable 
may  diminish,  and  one  or  more  branch  or  lateral  cables  may  be  taken  off. 


UNDERGROUND  CABLE  UNIT  COSTS 


141 


The  units  as  given  in  Figs.  45  and  46  cover  only  the  cost  of  straight 
splicing.  The  additional  cost  of  branch  or  special  splices  over  the  cost  of 
straight  splices  are  computed,  as  shown  in  Fig.  47. 


SPLICE. 

Add  for 
Each  Ad- 
ditional 
Leg.! 

Add  for 
Each 
25  Pairs 
$0.90. 

Total 
Additional 
Cost. 

400-200-200  

n  75 

$1  75 

400-400-200,         .         . 

1  75 

$7  20 

8  95 

200-200-25,  . 

1  25 

90 

2  15 

200-200-25,  . 

1  25 

90 

2  15 

200-175-25-25, 

2  50 

90 

3  40 

175-50-50-25, 

2  50 

2  50 

400-200-200, 

1  75 

__ 

1  75 

400-400-100, 

1  25 

3  60 

4  85 

400-200-200, 

1  75 

1  75 

200-200-50-50, 

2  50 

3  60 

6  10 

200-200-50,  . 

1  25 

1  80 

3  05 

200-150-25,  . 

1  25 

1  25 

400-400-100-50, 

2  50 

5  40 

7  90 

150-125-25,  . 

. 

1  25 

_ 

1  25 

400-400-50,  . 

25 

1  80 

3  05 

400-400-25,  . 

25 

90 

2  15 

400-200-25,  . 

I? 

25 

90 

2  15 

400-200-200, 

. 

75 

1  75 

200-200-25,  . 

25 

90 

2  15 

400-200-200, 

75 

1  75 

400-400-150, 

50 

5  40 

6  90 

400-400-75,  . 

25 

2  70 

3  95 

.400-200-50,  . 

25 

1  25 

125-50-50-25, 

50 

_ 

2  50 

50-25-25,      . 

25 

_ 

1  25 

200-200-25,  . 

25 

90 

2  15 

400-400-200, 

75 

7  20 

8  95 

200-150-25,  . 

25 

_ 

1  25 

400-200-200, 

75 

_ 

1  75 

400-200-25,  . 

25 

_ 

1  25 

400-400-25,  . 

25 

90 

2  15 

400-400-200 

75 

7  20 

8  95 

150-125-25, 

t 

25 

1  25 

150-150-50, 

25 

•  1  80 

3  05 

125-100-25, 

25 

_ 

1  25 

150-100-50, 

25 

_ 

1  25 

100-100-25, 

25 

90 

2  15 

100-100-25,  . 

25 

90 

2  15 

Up  to  150-pair,  $1.25;   150-pair,  $1.50;  200-pair,  $1.75. 
FIG.  47.  —  Additional  costs  for  special  splices. 


It  should  be  clearly  borne  in  mind  that  the  prices  given  in  these  tables 
are  merely  for  illustrative  purposes,  —  to  show  the  general  method  which 
should  be  used  in  building  up  the  unit  costs.  Material  and  labor  prices 
fluctuate  so  rapidly  and  are  so  dependent  upon  the  exigencies  of  individual 
cases  that  it  is  impossible  to  publish  unit  costs  which  will  be  suitable  for 
practical  appraisal  purposes.  Every  case  should  be  carefully  considered 
by  itself  and  all  of  the  variable  factors  thoroughly  analyzed  before  attempt- 
ing to  build  up  unit  costs.  Otherwise,  if  the  appraisal  is  to  be  submitted 
to  a  public  service  commission,  it  will  undoubtedly  be  found  that  weak 


142        TELEPHONE  RATES  AND  VALUES 

spots  will  develop  under  the  searching  scrutiny  of  the  commission's 
experts. 

248.  Subsidiary  or  Lateral  Cables.  —  The  unit  costs  for  the  subsid- 
iary or  lateral  cables  should  be  built  up  in  exactly  the  same  manner  as 
those  for  the  underground  cable  proper.    In  all  probability  the  cost  per 
foot  of  pulling  the  cable  will  be  found  higher  in  case  of  the  lateral  cables. 
This  is  due  to  the  fact  that  lateral  conduit  runs  are  not  always  straight, 
and  that  it  is  nearly  always  necessary  to  pull  the  cable  through  a  bend  at 
itsj  farther  extremity,  at  the  point  where  it  turns  up  the  pole  or  building 
wall. 

Under  the  heading  "Lateral  Cables"  also  comes  the  consideration  of 
underground  terminal  or  cable  box  costs.  The  method  of  building  up 
these  costs  is  very  similar  to  that  outlined  in  Chapter  XIV  on  aerial 
cable  costs,  so  it  will  not  be  necessary  to  consider  this  phase  of  the  subject 
of  unit  costs  again. 

249.  Interior  Block  Cables.  —  While  the  interior  block  cable  plant 
is  part  and  parcel  of  the  underground  system  as  included  under  account 
245,  it  is  nevertheless  a  fact  that  the  unit  costs  involved  in  block  cable 
work  are  very  much  higher  than  those  for  either  underground  cable  proper 
or  lateral  cable. 

This  is  due  to  the  fact  that  block  cables  have  to  be  clamped  to  building 
walls  or  rear  fences.  Where  the  cable  is  to  be  attached  to  brick,  concrete 
or  stone  walls,  it  is  necessary  to  drill  the  walls  at  intervals  of  18  inches  or 
2  feet,  and  insert  expansion  bolts  for  holding  the  cable  clamps  properly. 
This  process  of  installing  block  cables  is  a  laborious  and  costly  one  at  best. 

Unfortunately  it  is  rarely  possible  to  place  block  cable  in  a  straight 
horizontal  run  near  enough  to  the  ground  to  be  readily  accessible  to  the 
workmen.  The  additional  cost  of  making  detours  to  avoid  obstructions, 
and  to  so  place  the  cable  as  to  render  it  comparatively  free  from  danger  of 
mutilation,  is  an  appreciable  one.  It  is  frequently  necessary  for  the  men 
to  work  in  inaccessible  places,  using  ladders  and  in  some  cases  platforms 
swung  from  the  roofs  of  the  buildings. 

All  of  these  factors  necessarily  tend  to  materially  increase  the  cost  of 
block  cable  work.  In  some  cases  it  will  be  found  that  the  average  cost  per 
foot  for  a  given  size  of  cable  is  three  or  four  times  the  cost  per  foot  of  the 
same  size  of  cable  placed  in  conduit.  Fortunately  the  interior  block  method 
of  distribution  in  most  plants  is  confined  to  a  comparatively  few  blocks 
in  the  congested  commercial  districts. 

If  desired,  unit  costs  per  foot  may  be  built  up  in  much  the  same  manner 
as  described  for  the  determination  of  the  cost  of  the  underground  cable 
proper.  However,  in  the  larger  cities  the  relative  value  of  the  interior 
block  cable  plant  is  comparatively  small,  and  an  experienced  appraisal 
engineer  can  usually  estimate  a  cost  per  city  block  that  will  be  close 


UNDERGROUND  CABLE  UNIT  COSTS  143 

enough  for  all  ordinary  purposes.  This  cost  per  block  may  vary  from  $200 
to  $1.000  per  block,  according  to  the  size  of  the  cable  used  and  to  the 
difficulties  encountered  in  its  installation. 

250.  House  or  Building  Cables.  —  The  unit  costs  of  house  cables  are 
largely  dependent  upon  the  type  of  building  in  which  the  cable  is  placed. 
In  modern  buildings,  where  large  and  readily  accessible  vertical  cable 
shafts  are  provided,  the  unit  cost  will  be  appreciably  lower  than  in  the  case 
of  old  buildings  where  the  ingenuity  of  the  construction  gang  has  been 
severely  taxed  to  find  a  suitable  place  for  the  cable.  In  cabling  many  of 
the  older  buildings  in  the  larger  cities  it  has  been  found  necessary  to  drill 
walls  at  frequent  intervals,  to  fish  cables  under  floors,  and  in  some  cases 
to  cut  channels  in  the  building  walls  for  the  vertical  riser  cables.  The 
installation  methods  therefore  have  to  be  considered. 

It  is  difficult  to  outline  a  detailed  method  for  estimating  house  cable 
unit  costs.  Undoubtedly  the  best  way  of  evaluating  this  portion  of  a 
telephone  company's  plant  is  to  have  an  experienced  appraisal  engineer 
go  over  the  original  construction  plans  and  make  a  separate  estimate  for 
each  of  the  buildings  involved.  These  estimates  may,  in  many  cases,  be 
verified  by  consulting  original  records  of  cost,  taking  into  consideration 
the  differences  of  material  and  labor  market  prices  at  the  time  of  original 
installation  and  at  the  time  of  appraisement. 

251.  Central  Office  Terminating  Cables. —  Fig.  48  shows  the 
method  of  computing  the  unit  costs  for  the  central  office  terminating 
cables.  In  this  connection  it  will  be  realized  that  the  cost  per  foot  for  a 
short  length  of  a  given  size  cable  will  be  appreciably  higher  than  the  cost 
p§r  foot  of  a  long  length  of  the  same  size  cable.  This  is  due  to  the  fact 
that  the  labor  of  splicing  and  fanning  the  cable  on  the  main  frame  is  an 
appreciable  factor. 

Where  various  lengths  of  a  given  size  or  gauge  of  cable  are  encountered, 
it  is  well  to  compute  the  unit  cost  per  foot  on  the  basis  of  the  average 
length.  This  unit  cost  may  subsequently  be  applied  to  the  total  number 
of  feet  of  cable,  as  shown  in  the  inventory. 


144        TELEPHONE  RATES  AND  VALUES 


Silk  and  Cotton  Lead  Covered  Cable 
25-pair,  No.  22  gauge:  — 

8-foot  cable  at  $0.150,    .          .' $1  200 

Miscellaneous  material,            ........  250 

Total, $1  450 

2  per  cent  loss  and  waste,        ........  029 

Total  material,  . $1  479 

Total  labor, 1  300 

Total  cost,           .          .          . $2  779 

Unit  cost  per  foot 0  347 

50-pair,  No.  22  gauge :  — 

10-foot  cable  at  $0.294, $2  940 

Miscellaneous  material,            ........  500 

Total, $3  440 

2  per  cent  loss  and  waste,        ........  069 

Total  material, $3  509 

Total  labor,         . 2  600 

Total  cost,           .          .      • $6  109 

Unit  cost  per  foot, 0  611 

200-pair,  No.  22  gauge:  — 

12-foot  cable  at  $0.805,             .                                                                       .  $9  660 

Miscellaneous  material,             .          .          .          .          .          .          .          .  2  000 

Total $11  660 

2  per  cent  loss  and  waste,        ...... 

Total  material •  $11  893 

Total  labor, .  - 10  500 

Total  cost, .  $22  393 

Unit  cost  per  foot,       .....  .  .1  866 

FIG.  48.  —  Unit  costs  of  terminating  underground  cables. 


CHAPTER  XVIII 
MISCELLANEOUS   UNIT   COSTS 

252.  Unit  Costs  of  General  Equipment.  —  It  will  be  recalled  that 
under  the  heading,  "  General  Equipment,  Account  No.  260,"  is  included 
the  cost  of  all  equipment  classified  in  the  sub-accounts  listed  hereunder:  — 

Office  Furniture  and  Fixtures,  Account  261. 

General  Shop  Equipment,  Account  262. 

General  Store  Equipment,  Account  263. 

General  Stable  and  Garage  Equipment,  Account  264. 

General  Tools  and  Implements,  Account  265. 

It  is  obviously  unnecessary  to  prescribe  any  detailed  method,  or 
methods,  for  building  up  unit  costs  for  appraising  that  portion  of  a  tele- 
phone company's  property  which  comes  under  the  classification  of  general 
equipment  or  any  of  the  sub-accounts  listed.  Suffice  it  to  say  that  the 
reproduction  cost  method  should  be  strictly  adhered  to,  —  all  equipment 
should  be  priced  at  representative  prices  as  of  the  appraisal  date.  If  any 
of  the  equipment  is  second  hand,  allowance  for  it  should  be  made  in 
estimating  the  present  value  and  not  in  determining  the  reproduction  cost. 

It  is  a  comparatively  simple  matter  to  obtain  reproduction  cost  prices 
from  manufacturing  companies,  and  from  trade  catalogues  and  lists,  for 
all  of  the  equipment  falling  under  accounts  261  to  265,  inclusive. 

253.  Material  and  Supplies,  Account  122.  —  The  suggestions  given 
for  the  appraisement  of  general  equipment  apply  equally  well  to  material 
and  supplies.    Reproduction  cost  should  be  used  in  every  case.    If  material 
is  old  or  second  hand,  allowance  for  its  condition  as  of  the  appraisal  date 
should  be  made  in  determining  the  depreciated  or  present  value.    Prices 
for  all  property  falling  under  the  head  "Material  and  Supplies"  may  be 
readily  secured  from  manufacturers'  catalogues  and  price  lists. 

254.  Monetary  Value  of  Right  of  Way.  —  At  first  thought  the 
appraisement  of  the  right  of  way  of  a  telephone  company  may  seem  a 
relatively  unimportant  matter.    As  a  matter  of  fact,  many  of  the  smaller 
companies  have  secured  rights  of  way  on  highways  and  private  property, 
making  actual  cash  payments  for  the  privileges  involved.     Where  this 
is  the  case  one  would  naturally  think  that  right  of  way  can  have  no  place 
in  an  appraisement  for  rate-making  purposes.     However,  it  seems  to 
the  author  that  the  proper  way  to  look  at  this  phase  of  the  subject  is  to 
consider  right  of  way  as  an  element  in  the  original  construction,  or  repro- 
duction, cost  of  the  property. 


146        TELEPHONE  RATES  AND  VALUES 

Courts  and  commissions  may  well  contend  that  it  is  unfair  to  assign  a 
monetary  value  to  franchises  or  privileges  which  are  acquired  by  a  utility 
company  without  cost  to  itself.  But  is  this  ever  really  the  case?  Is  it  not 
true  that  a  certain  cost  is  always  involved  in  the  securing  of  the  right  of 
way  necessary  for  the  construction  of  a  telephone  property,  even  though 
no  actual  cash  payments  are  made  for  liens  or  leases  of  private  or  public 
property? 

Granting  that  this  is  true,  and  it  is  believed  the  reader  will  agree  that 
it  is  after  reading  the  following  paragraphs,  we  have  ample  precedent  for 
placing  a  monetary  value  on  the  right  of  way  on  the  basis  of  what  it 
actually  cost  or  what  it  would  probably  cost  in  reproducing  the  property 
under  consideration. 

255.  Elements  of  Cost  of  Right  of  Way.  —  It  is  a  well-known  fact 
that  no  telephone  property  of  appreciable  size  was  ever  constructed  with- 
out a  good  deal  of  dickering  between  the  representatives  of  the  company 
and  the  owners  of  the  property  abutting  on  the  pole  lines.  It  is  usually 
customary  to  assign  one  or  more  trained  right  of  way  agents  to  the  con- 
struction forces,  who  devote  all  their  time  to  smoothing  out  the  difficulties 
incurred  in  the  construction  of  highway  pole  lines,  or,  better  yet,  to 
forestalling  any  possible  trouble  by  preceding  the  construction  gangs  and 
explaining  to  the  property  owners  just  what  is  to  be  done. 

Unquestionably  the  salary  and  expenses  of  these  right  of  way  agents 
are  part  and  parcel  of  the  construction  cost  of  the  property,  and  they  should 
be  included  in  a  reproduction  valuation. 

Where  poles  are  placed  on  private  property  it  is  of  course  necessary  to 
have  a  right  of  way  agent  or  some  other  authorized  representative  of  the 
company  secure  either  verbal  or  written  permission  for  the  use  of  the 
property. 

Another  item  of  expense  which  is  inevitably  incurred  in  connection 
with  the  construction  of  a  telephone  property  consists  of  payments  for 
damage  claims  incurred  during  the  construction  period.  No  matter  how 
careful  the  men  may  be,  accidents  will  happen.  It  may  be  that  in  placing 
a  pole  a  cement  sidewalk  is  broken  or  a  fence  or  railing  damaged.  Tele- 
phone companies  are  usually  ready  and  willing  to  fully  compensate  the 
owners  of  damaged  property,  and  all  cash  payments  made  in  settlement 
of  such  damage  claims  are  chargeable  to  the  right  of  way  account. 

Still  another  element  of  right  of  way  cost  is  involved  in  the  attachment 
of  a  telephone  company's  wires  or  cables  to  pole  lines  of  other  companies. 
In  constructing  a  new  plant  it  is  often  desirable  to  utilize  an  existing  pole 
line  belonging  to  a  foreign  company,  rather  than  to  go  to  the  expense  of 
building  a  new  line  for  the  exclusive  use  of  the  telephone  company. 

In  a  case  of  this  kind  not  only  is  it  necessary  to  secure  the  permission 
of  the  company  owning  the  poles,  but  also,  in  the  majority  of  cases,  to 


MISCELLANEOUS  UNIT  COSTS  147 

stand  the  expense  of  minor  changes  in  the  position  of  the  foreign  company's 
wires  to  provide  space  for  the  telephone  wires  on  the  poles  in  question. 
All  of  this  expense  is  chargeable  to  the  right  of  way  account. 

256.  Estimate  of  Cost  of  Right  of  Way.  —  In  appraising  a  telephone 
property  constructed  long  before  the  date  of  appraisal  it  is  necessary,  of 
course,  to  estimate  the  right  of  way  expense,  just  as  it  is  necessary  to 
estimate  many  of  the  other  costs  encountered  in  a  reproduction  appraisal. 
The  following  estimate  of  the  cost  of  securing  various  types  of  right  of 
way  is  the  result  of  the  consideration  of  a  large  number  of  actual  cases :  — 

Cost  of  right  of  way  per  pole  for  city  poles  on  public  highways,          .          .  $0  25 

Cost  of  right  of  way  per  pole  for  city  poles  on  private  property,          .  2  00 

Cost  of  right  of  way  per  pole  for  rural  poles  on  public  highways,         .           .  15 

Cost  of  right  of  way  per  pole  for  rural  poles  on  private  property,  .  1  50 
Cost  of  right  of  way  per  pole  for  telephone  attachments  on  foreign  city 

poles, 50  cents  to  1  00 

Cost  of  right  of  way  per  pole  for  telephone  attachments  on  foreign  rural  poles  £0 

It  will  be  noted  that  the  rural  costs  run  slightly  lower  than  the  city 
costs.  This  is  due  to  the  fact  that,  with  the  possible  exception  of  where 
poles  are  placed  immediately  in  front  of  his  house,  the  rural  owner  is  a 
good  deal  less  likely  to  find  fault  than  a  city  property  owner. 

The  cost  of  right  of  way  may  also  be  computed  by  estimating  the  cost 
of  the  theoretical  organization  necessary  to  do  the  right  of  way  work. 
Such  an  estimate  would  take  somewhat  the  form  given  in  Fig.  49. 

Estimate  of  expenses  incurred  in   conducting  right  of  way  negotiations  during 

construction :  — 

3  right  of  way  agents  attached  to  construction  crews,  1£  years  at  $900      .  $4,050 

1  clerk  in  charge  of  right  of  way  records,  1 1  years  at  $600          .           .           .  900 
^  joint  use  of  three  automobiles  attached  to  construction  crews  for  stock 

and  right  of  way  purposes,  1|  years  at  $500,      .....  1,125 
Legal  expenses  in  securing  right  of  way,  as  provided  for  under  general 

and  legal  expenses,           .........  1,000 

Incidental  expenses,  car  fare,  fees  paid  for  special  permits,  grievances,  etc.,  500 


Total,  .          .  $7,575 

FIG.  49.  —  Estimate  of  right  of  way  negotiating  expenses. 

257.  Concluding  Remarks  on  Unit  Costs.  —  In  concluding  the 
discussion  of  the  subject  of  unit  costs  there  are  several  points  which  deserve 
most  careful  consideration  on  the  part  of  the  reader. 

1.  No  matter  how  carefully  an  inventory  may  be  prepared,  it  is  of  little 
value  unless  the  unit  costs  used  in  its  appraisement  are  fair  ones,  and 
represent  actual  conditions  as  of  the  appraisal  date. 

2.  The  determination  of  the  unit  costs  for  any  type  of  plant  should  be 
prefaced  by  a  careful  study  of  both  material  and  labor  prices  for  a  period 


148        TELEPHONE  RATES  AND  VALUES 

of  several  years  preceding  the  appraisal,  and  by  an  intelligent  "guess" 
as  to  what  the  material  and  labor  market  is  likely  to  do  during  the  several 
years  following  the  appraisal. 

3.  While  it  is  entirely  possible  that  an  operating  telephone  company 
may  have,  within  its  own  ranks,  men  who  are  perfectly  capable  of  making 
unit  cost  studies,  it  is  nevertheless  a  fact  that  courts  and  commissions  are 
usually  somewhat  prejudiced  against  an  appraisal  based  on  unit  costs 
computed  by  the  company's  own  experts.  The  reason  for  this  will  be 
obvious.  If  the  owner  of  a  house  tells  you  that  it  is  worth  $10,000,  no 
matter  how  much  confidence  you  may  have  in  his  judgment  and  in  his 
integrity,  you  will  naturally  place  more  weight  upon  a  valuation  made 
by  a  disinterested  appraisal  expert. 

It  is  therefore  always  good  policy  either  to  have  the  inventory  and 
appraisal  made  entirely  by  a  disinterested  outsider,  or  to  call  in  an  expert 
to  check  up  your  own  valuation,  and  to  hold  yourself  in  readiness  to  pro- 
duce this  expert  to  substantiate  your  costs  if  they  are  questioned  by  court 
or  commission. 


CHAPTER  XIX 
DEPRECIATION 

258.  Importance  of  Depreciation.  —  No  treatise  on  telephone  valua- 
tions would  be  complete  without  a  consideration  of  the  subject  of  deprecia- 
tion.   This  subject  is  a  large  one,  and  one  that  is  just  as  important  from 
the  standpoint  of  the  operating  official  as  from  the  standpoint  of  the 
appraisal  engineer. 

The  part  that  depreciation  plays  in  the  appraisement  of  telephone 
properties  has  already  been  referred  to  in  the  discussion  of  present  value 
and  in  the  preliminary  chapter  on  appraisal  definitions.  The  importance 
of  the  subject  of  depreciation  to  the  operating  manager,  and  its  relation 
to  his  ever-present  problem  of  establishing  a  fund  adequate  to  finance 
the  replacement  of  plant  as  it  passes  out  of  existence,  has  not,  however, 
been  discussed  heretofore. 

The  latter  subject  is  so  important  and  so  vital  to  the  owners  and  opera- 
tors of  telephone  properties,  both  from  the  standpoint  of  rate-making  and 
from  the  standpoint  of  plant  operation,  that  it  is  proposed  to  preface 
the  discussion  in  the  present  chapter  by  a  brief  review  of  the  fundamental 
depreciation  definitions  given  in  Chapter  II. 

259.  Definition  of  Depreciation.  —  The  Century  dictionary  defines 
depreciation  as  "  a  falling  in  value;  reduction  in  worth,"  while  the  Standard 
dictionary  says  that  depreciation  is  "a  lowering  in  worth."     Another 
definition  —  an  excellent  one  —  is  that  given  by  Dr.  R.   H.   Whitten 
in  his  book  on  "  Valuation  of  Public  Service  Corporations."     It  is  as 
follows :  — 

Depreciation  can  be  denned  as  the  lessened  utility  value  caused  by  physical 
deterioration  or  lack  of  adaptation  to  function. 

The  word  "utility"  is  undoubtedly  used  by  Dr.  Whitten  in  its  broader 
sense,  in  other  words,  as  a  synonym  for  "  usefulness." 

260.  Causes  of  Depreciation.  —  Depreciation  may  be  considered 
under  two  general  classifications,  —  the  first,  physical  depreciation,  and 
the  other,  functional  depreciation. 

Physical  depreciation  is  that  resulting  from  wear  and  tear,  age  and 
physical  decay.  Functional  depreciation  is  that  due  to  causes  other  than 
purely  physical  ones,  such  as  inadequacy  and  obsolescence. 

To  express  the  foregoing  a  little  differently,  it  may  be  said  that  the 


150        TELEPHONE  RATES  AND  VALUES 

subject  of  depreciation  is  divisible  into  four  general  classifications,  as 
follows :  — • 

1.  Depreciation  due  to  wear  and  tear. 

2.  Depreciation  due  to  age  or  physical  decay. 

3.  Depreciation  due  to  inadequacy. 

4.  Depreciation  due  to  obsolescence. 

The  first  two  classifications  are  those  resulting  from  physical  causes, 
and  the  last  twro  are  those  resulting  from  functional  causes. 

In  addition  to  these  four  classifications  of  depreciation  there  is  still 
another  which  plays  a  very  important  part  in  the  case  of  many  telephone 
companies.  This  fifth  cause  may  be  termed  "  extraordinary  deprecia- 
tion." 

261.  Wear  and  Tear  Depreciation.  —  The  depreciation  due  to 
wear  and  tear,  as  the  term  suggests,  is  that  lessening  in  value  resulting 
from  actual  use  or  service.  This  class  of  depreciation  does  not  play  as 
important  a  part  in  the  depreciation  of  telephone  properties  as  it  does  in 
the  depreciation  of  industrial  plants.  As  an  illustration,  machinery  which 
is  in  constant  use  naturally  wears  out  and  has  to  be  replaced.  This 
wearing-out  process  is  the  direct  result  of  use. 

A  telephone  plant,  on  the  other  hand,  is  composed  largely  of  poles, 
cables,  conduit,  wires,  subscribers'  instruments  and  central  office  equip- 
ment. It  will  be  readily  seen  that  these  items  of  plant  are  not  subjected 
to  any  vigorous  mechanical  use,  with  the  possible  exception  of  portions 
of  the  central  office  equipment.  In  other  words,  telephone  property 
depreciation  is  more  largely  due  to  age,  physical  decay,  inadequacy  and 
obsolescence  than  to  wear  and  tear.  There  are,  of  course,  exceptions  to 
this  rule.  The  cords,  for  instance,  of  a  central  office  or  private  branch 
exchange  switchboard  are  subjected  to  constant  friction  in  the  sockets 
through  which  they  operate,  and  often  wear  out  rapidly,  due  to  actual 
use,  or,  in  other  words,  to  wear  and  tear. 

This,  however,  cannot  be  properly  cited  as  an  illustration  of  wear  and 
tear  depreciation  for  the  reason  given  in  the  following  paragraph. 

In  connection  with  the  subject  of  wear  and  tear  depreciation  there  is 
one  point  which  should  be  clearly  borne  in  mind.  The  lessening  in  value 
of  any  item  of  equipment  which  is  made  up  of  a  number  of  small  and  re- 
placeable parts  is  naturally  somewhat  offset  by  current  repairs.  Take, 
for  instance,  the  case  of  a  subscriber's  instrument.  The  receiver  shell, 
transmitter,  cords,  ringer  and  induction  coil  are  necessarily  replaced 
from  time  to  time  in  connection  with  plant  maintenance.  Thus  a  sub- 
scriber's set  which  has  been  in  service  for  a  long  time  may  be  found,  on 
appraisement,  to  be  in  almost  as  good  condition  —  so  far  as  practical 
operation  is  concerned  —  as  a  new  set. 

This  is  due  to  the  fact  that  the  elementary  parts  are  replaced  as  fast  as 


DEPRECIATION  151 

they  become  defective.  Telephone  accounting,  in  fact,  sanctions  the  in- 
clusion of  the  cost  of  such  minor  replacements  as  a  part  of  the  operating 
expense  of  the  plant.  Nevertheless,  there  comes  a  time  —  no  matter 
how  carefully  the  plant  may  be  maintained  —  when  the  cumulative 
effect  of  wear  and  tear  depreciation  becomes  apparent,  when  it  is  cheaper 
to  discard  the  apparatus  entirely  than  to  try  to  maintain  it  by  further 
minor  replacements  of  its  elementary  parts. 

262.  Depreciation  due  to  Physical  Decay.  —  This  phase  of  physical 
depreciation  plays  a  most  important  part  in  the  depreciation  of  telephone 
properties.     Depreciation  due  to  age  and  physical  decay  is  largely  depend- 
ent on  current  repairs  or  replacements. 

It  makes  little  difference  whether  a  telephone  cable  or  a  pole  is  in 
constant  use  or  whether  ^  is  allowed  to  stand  idle;  the  depreciation  is 
just  about  as  rapid  in  one  case  as  in  another,  and  this  is  due  entirely  to 
natural  causes,  i.e.,  age  and  physical  decay. 

263.  Depreciation  due  to  Inadequacy.  —  While  depreciation  due 
to  age  and  physical  decay  is  undoubtedly  the  most  important  factor  to  be 
considered  in  the  determination  of  the  depreciation  of  the  outside  plant  of 
a  telephone  company,  it  is  nevertheless  a  fact  that  functional  depreciation 

-that  due  to  inadequacy  and  obsolescence  —  plays  a  most  important 
part.  In  the  case  of  central  office  equipment  functional  depreciation  is 
even  more  of  a  factor  than  in  the  case  of  the  outside  plant. 

Inadequacy  depreciation,  as  the  term  suggests,  is  that  lessening  in 
value  due  to  the  fact  that  an  item  of  plant  becomes  inadequate  to  meet 
the  requirements  placed  upon  it.  For  instance,  the  telephone  switch- 
board, though  new  and  in  perfectly  good  condition  and  of  modern  design, 
may  become  inadequate  to  care  for  a  rapid  increase  in  the  company's 
subscriber  list.  In  other  words,  a  switchboard,  which  under  ordinary 
conditions  would  last  twenty  or  more  years,  may  have  to  be  retired  at 
the  end  of  five  years'  service,  due  to  an  unprecedented  growth  in  the  com- 
pany's business. 

In  this  case  the  depreciation  or  lessening  in  value  of  the  board  between 
the  time  it  was  originally  installed  and  the  time  it  was  removed  would  be 
chargeable  entirely  to  inadequacy.  Of  course  this  illustration  is  rather 
extreme;  under  ordinary  circumstances,  instead  of  replacing  the  board 
with  a  new  one,  additional  units  of  a  similar  type  would  be  installed. 
Nevertheless,  cases  of  this  kind  have  been  encountered. 

A  case  is  recalled  to  the  author's  mind  where  a  new  magneto  board 
was  installed  a  few  years  ago.  From  all  of  the  data  available  at  the  time 
of  its  installation  this  board  was  of  sufficient  capacity  to  serve  the  com- 
munity in  which  it  was  located  for  many  years  to  come.  It  so  happened, 
however,  that  within  two  years  a  large  industrial  organization  employing 
many  thousand  men  established  a  plant  in  the  town.  The  telephone 


152        TELEPHONE  RATES  AND  VALUES 

business  grew  so  rapidly  that  it  was  found  necessary  to  appreciably  in- 
crease the  central  office  facilities,  and  the  future  prospects  made  it  advisable 
to  replace  the  local  battery  system  with  a  common  battery  plant. 

Perhaps  better  examples  of  inadequacy  depreciation  may  be  found  in 
the  outside  plant.  Aerial  cables  frequently  have  to  be  retired  from  service, 
not  because  they  are  worn  out  or  incapable  of  giving  good  service,  or 
because  they  are  obsolete  in  type,  but  because  the  plant  has  grown  so 
fast  that  they  are  entirely  inadequate  to  serve  the  territory  for  which 
they  were  originally  designed.  They  a~e'  usually  replaced  by  a  more 
extensive  and  a  more  flexible  underground  cable  plant. 

264.  Obsolescence  Depreciation.  —  "Obsolescence  means  the  de- 
preciation of  a  property  through  the  development  of  something  newer, 
or  either  more  economical  or  more  of  a  fad^  Like  inadequacy,  it  may 
necessitate  the  abandonment  of  property  long  before  it  is  worn  out,  and 
in  many  cases  arises  largely  from  the  demands  of  the  public."     This 
definition  is  from  "Valuation  of  Public  Utility  Properties,"  by  Henry  Floy. 

While  it  is  true  that  obsolescence  depreciation  plays  a  part  in  the  opera- 
tion of  telephone  properties,  it  is  not  nearly  as  important,  from  the  stand- 
point of  either  the  appraisal  engineer  or  the  operating  executive,  as  are 
age  depreciation  and  inadequacy  depreciation.  The  telephone  art  has 
developed  to  a  point  where  the  substitution  of  a  radically  different  design 
in  order  to  effect  an  economy  or  to  meet  a  popular  demand  is  somewhat 
of  a  rarity. 

Perhaps  one  of  the  best  examples  of  obsolescence  depreciation  to  be 
had  in  the  telephone  field  is  that  of  coin  collectors  used  in  connection 
with  pay  stations.  During  the  last  few  years  the  larger  companies  have 
retired  a  quantity  of  various  types  of  instruments  in  favor  of  the  pre- 
payment type,  —  the  type  where  one  deposits  the  coin  before  he  is  able 
to  signal  the  operator.  This  is  not  necessarily  due  to  the  fact  that  the 
other  types  were  worn  out  or  inadequate,  but  because  the  prepayment 
type  had  made  them,  from  the  manager's  standpoint,  uneconomical  and 
obsolete. 

265.  Extraordinary  Depreciation.  —  Extraordinary  depreciation,  as 
the  term  suggests,  is  that  resulting  from  extraordinary  causes.     For 
instance,  a  recent  hurricane  in  Mattoon,  111.,  wiped  out  practically  the 
entire  telephone  plant.    Depreciation  —  from  a  value  representing  a  plant 
in  active  service  to  a  zero  (or  perhaps  even  a  negative)  value  —  occurred 
in  the  space  of  a  few  minutes. 

This  was  entirely  due  to  a  cause  far  removed  from  the  ordinary,  and 
which  could  not  be  accounted  for  under  any  of  the  causes  of  depreciation 
we  have  so  far  considered. 

It  is  customary,  therefore,  to  make  some  provision  for  extraordinary 
depreciation.  Perhaps  one  of  the  most  frequent  causes  of  extraordinary 


DEPRECIATION  153 

depreciation  is  the  so-called  sleet  storm.  Wholesale  fire  destruction, 
such  as  resulted  from  the  San  Francisco  or  Baltimore  fires,  is  another 
cause  of  extraordinary  depreciation. 

266.  Depreciation  as  a  Factor  in  Appraisal  Work.  —  As  we  have 
already  seen,  depreciation  plays  a  most  important  part  in  appraisal  work, 

—  in  the  determination  of  the  so-called  present  or  depreciated  value.  In 
determining  the  present  condition  of  a  plant  we  consider  the  component 
items  in  detail,  estimating  first  the  probable  life  they  would  have  if  sub- 
jected only  to  physical  depreciation,  and  second,  how  this  probable  life 
will  be  affected  by  inadequacy  and  obsolescence. 

Probably  the  relation  of  depreciation  to  appraisal  work  can  be  more 
clearly  shown  by  a  simple  illustration,  very  similar  to  one  given  in  a 
foregoing  chapter. 

Assume  the  reproduction,  in  service,  cost  of  a  piece  of  aerial  cable  at 
$1,000.  Assume,  further,  that  from  the  best  data  available  the  appraisal 
engineer  finds  that  aerial  cable  of  the  size  and  type  of  the  one  under  con-  - 
sideration  has  an  average  life  —  taking  into  consideration  physical  decay, 
inadequacy  and  obsolescence,  and  all  of  the  other  depreciation  factors  — 
of  ten  years.  Suppose  that  after  deducting  the  probable  cost  of  removal 
he  estimates  that  the  aerial  cable  in  question  will  have  a  salvage  value  at 
the  end  of  its  ten-year  useful  life  of  30  per  cent  of  its  reproduction  cost, 
in  this  case  $300. 

The  wearing  value  —  that  portion  of  the  reproduction  cost  which  will 
entirely  disappear  during  the  ten-year  life  of  the  cable  —  will  then  be 
$1,000  less  $300,  or  $700.  One-tenth  of  this  amount  or  $70,  will  disappear 
each  year  that  the  cable  is  maintained  in  service.  If  the  cable  is  five  years 
old  at  the  date  of  appraisal,  then  the  accrued  depreciation  at  that  time 
will  be  5  times  $70,  or  $350,  and  the  present  value  will  be  $1,000  less  $350, 
or  $650. 

267.  Annual  Rate  of  Depreciation.  —  It  will  be  seen,  then,  that 
the  annual  rate  of  depreciation  is  dependent,  first,  upon  the  life  of  the 
plant  in  years,  and  second,  upon  the  salvage  value  at  the  end  of  its  useful 
life.    The  whole  question  of  the  annual  rate  of  depreciation  of  telephone 
properties  is  one  that  has  received  much  of  the  time  and  thought  of  some 
of  the  foremost  engineers  in  the  country.    The  term  ' '  rate  of  depreciation ' ' 
as  here  used  means  the  annual  rate  at  which  the  lessening  of  wearing  value 
takes  place.     In  the  illustration  presented  in  the  foregoing  paragraph, 
$70  is  the  annual  rate  of  depreciation. 

268.  Depreciation  and  Depreciation  Reserve.  —  Before  attempting 
to  discuss  the  practical  side  of  depreciation  as  applied  to  telephone  proper- 
ties, it  may  be  well  to  consider  the  relation  between  depreciation  and 
depreciation  reserve.    In  order  to  clearly  understand  this  relation,  let  us 
again  consider  the  illustration  of  the  aerial  cable.    Obviouslv  some  method 


154        TELEPHONE  RATES  AND  VALUES 

must  be  devised  to  make  good  the  $700  depreciation  in  value  between  the 
time  the  cable  is  installed  and  the  time  it  is  junked. 

There  are  two  possible  ways  in  which  this  might  be  done.  First,  a  fund 
of  $70  —  equal  to  the  annual  lessening  in  value  —  might  be  set  aside 
each  year.  This  fund,  without  interest,  would  equal  $700  at  the  end  of 
the  estimated  useful  life  of  the  cable.  The  $700  fund  thus  built  up  to 
replace  the  wearing  value  at  the  end  of  the  useful  life  of  the  cable  would 
be  known  as  "depreciation  reserve  fund."  This  method  of  building  up 
the  fund  is  known  as  the  "straight-line"  method. 

If,  on  the  other  hand,  instead  of  setting  aside  $70  each  year,  an  amount, 
predetermined  from  annuity  tables,  be  set  aside  annually  which,  with 
interest  compounded,  would  produce  a  fund  of  $700  at  the  end  of  ten 
years,  we  would  be  producing  a  depreciation  reserve  fund  by  what  is 
commonly  known  as  the  "sinking-fund"  method. 

269.  Relative  Merits  of  Sinking-fund  and  Straight-line  Methods 
.  of  Building  up  Depreciation  Reserve.  —  From  the  illustrations  which 

have  been  presented  it  will  be  apparent  that  if  a  sinking  fund  is  accumu- 
lated under  the  straight-line  method,  an  amount  considerably  in  excess 
of  $700  would  be  available  at  the  end  of  the  ten-year  period.  This  is 
due  to  the  fact  that,  assuming  the  fund  is  properly  invested,  interest  would 
be  constantly  accruing  on  the  increment  set  aside  each  year.  On  the 
other  hand,  if  the  sinking-fund  method  is  used,  a  fund  of  exactly  $700 
wdll  be  available  at  the  end  of  the  ten-year  period. 

At  first  glance,  therefore,  the  sinking-fund  method  would  seem  the 
fairer  of  the  two.  There  are,  however,  other  factors  to  be  taken  into  con- 
sideration. Our  hypothesis  has  been  based  upon  the  assumption  that 
the  aerial  cable  costing  $1,000  now  can  be  reproduced  for  $1,000  ten  years 
hence.  There  is  nothing  to  show  that  this  will  be  the  case.  As  a  matter 
of  fact,  cable  costing  $1,000  ten  years  ago  will  cost  in  the  neighborhood 
of  $2,000  or  $2,500  now. 

It  will  be  seen,  therefore,  that  the  straight-line  method  has  an  advantage 
over  the  sinking-fund  method  in  that  it  provides  a  margin  for  unforeseen 
contingencies,  such  as  increases  in  material  and  labor  costs.  Again,  the 
straight-line  method  has  the  advantage  of  being  much  simpler  from  the 
accounting  standpoint.  Obviously  it  is  much  easier  to  set  aside  $70  a 
year  for  ten  years  than  to  determine  from  annuity  tables  the  sum  which 
must  be  set  aside  each  year  to  produce  a  fund  of  $700  at  the  end  of  ten 
years. 

270.  Different  Viewpoints   of   Depreciation   and   Depreciation 
Reserve.  —  In  considering  the  two  allied  subjects  of  depreciation  and 
depreciation  reserve,  it  is  well  to  remember  that  they  may  be  viewed  from 
two  entirely  different  standpoints,  —  the  standpoint  of  the  engineer  and 
the  standpoint  of  the  accountant.    Professor  Earl  A.  Saliers  of  Yale  Uni- 


DEPRECIATION  155 

versity,  in  the  preface  of  his  work  on  the  "  Principles  of  Depreciation," 
clearly  outlines  these  two  viewpoints  as  follows:  — 

The  depreciation  problem  may  be  viewed  from  two  standpoints,  —  that  of 
the  accountant  and  that  of  the  engineer.  The  engineer  deals  with  physical  condi- 
tions, studies  plant  deterioration,  the  necessity  of  replacement,  and  so  on.  The 
accountant  devises  the  ways  and  means  of  recording  in  the  most  intelligent  manner 
the  facts  in  connection  with  the  changes.  The  work  of  the  two  should  be  correlated 
through  a  common  understanding  of  the  character  and  extent  of  depreciation. 
The  engineer  having  shown  what  the  rate  of  depreciation  is,  the  accountant  suggests 
devices  for  recording  it,  for  providing  replacement  funds,  etc.,  and  thus  for  the 
preservation  of  capital  values. 


To  express  Professor  Saliers'  thought  a  little  differently,  it  may  be 
said  that  it  is  the  function  of  the  engineer  to  determine  how  much  and  at 
what  rate  a  telephone  plant  depreciates,  while  it  is  the  accountant's 
office  to  devise  a  method  for  building  up  a  sum  adequate  to  make  good  this 
depreciation  at  the  end  of  the  useful  life  of  the  plant. 

271.  Confusion  of  Depreciation  and  Depreciation  Reserve.  — 
Depreciation  and  depreciation  reserve  are  constantly  confused  even  by 
those  supposedly  well  versed  in  appraisal  matters.  As  a  matter  of 
convenience  it  is  often  assumed  that  depreciation  reserve  is  built  up  at 
the  same  rate  that  the  plant  depreciates.  In  other  words,  for  convenience 
it  may  be  assumed  that  the  aerial  cable  plant  cited  in  the  foregoing  illus- 
tration depreciates  at  the  rate  of  one-tenth  of  its  wearing  value,  or  $70 
each  year,  and  that  a  like  amount  ($70)  is  set  aside  each  year. 

We  may  likewise,  for  convenience,  assume  that  the  wearing  away  of 
the  plant  takes  place  at  a  rate  similar  to  that  at  which  the  fund  for  depre- 
ciation is  built  up  under  the  sinking-fund  method.  In  other  words,  it  may 
be  assumed  that  the  accrued  depreciation  at  any  time  is  exactly  equal  to 
the  amount  accumulated  under  the  sinking-fund  method  in  the  depreciation 
reserve  fund. 

Either  of  these  assumptions  is  justifiable,  but  only  on  the  ground  of 
convenience.  The  depreciation  of  aerial  cable,  or  any  other  item  of  plant, 
may  not,  and  probably  does  not,  occur  at  the  same  rate  that  the  deprecia- 
tion fund  is  built  up,  whether  this  fund  is  built  up  on  the  straight-line 
or  on  the  sinking-fund  basis. 

As  a  matter  of  fact,  nobody  knows  just  how  a  telephone  property 
depreciates.  The  aerial  cable  used  in  the  illustration  may  wear  away 
uniformly  throughout  its  ten-year  life,  or  it  may  depreciate  slowly  at 
first  and  very  rapidly  toward  the  end  of  the  ten-year  period.  In  the  last 
analysis  it  makes  little  difference  how  it  depreciates  so  long  as  we  devise 
a  reasonable  method  for  writing  off  its  wearing  value  and  for  building  up  a 
fund  adequate  to  finance  its  replacement. 


156        TELEPHONE  RATES  AND  VALUES 

To  return  to  the  subject  of  the  annual  rate  of  depreciation  of  telephone 
properties,  it  may  be  said  that  the  straight-line  method  is  the  one  most 
frequently  used,  both  for  appraisal  purposes  and  for  building  up  a  deprecia- 
tion reserve. 

272.  Co-operation  between  Appraisal  Engineer  and  Accountant. 
-  Referring  again  to  the  distinction  between  depreciation  and  deprecia- 
tion reserve,  John  A.  Thomas,  secretary-treasurer  of  the  Lloyd-Thomas 
Company,  industrial  appraisal  engineers,  of  Chicago,  presented  an  excep- 
tionally clear  treatment  of  this  phase  of  the  subject  in  a  recent  article 
published  in  the  "Journal  of  Accountancy,"  New  York. 

Mr.  Thomas  directs  attention  to  the  fact  that  while  the  duties  of  the 
appraiser  and  those  of  the  accountant  are  necessarily  of  an  entirely  different 
nature,  nevertheless  their  respective  duties  are  so  interlocked  that  it  is 
most  important  that  each  should  have  a  clear  understanding  of  what  the 
other  is  trying  to  do.  He  further  suggests  that  although  the  viewpoints 
of  the  appraiser  and  the  accountant  are  different,  each,  in  its  way,  is 
perfectly  logical,  and  a  clear  understanding  of  the  function  of  each  should 
be  the  first  step  toward  the  co-operation  which  is  necessary  to  a  proper 
solution  of  the  problem  of  depreciation. 

273.  Duties   of   Appraisal   Engineer   and   Accountant.  —  "The 
appraisal  engineer,"  states  Mr.  Thomas,  "is  confronted  with  the  task  of 
determining  the  amount  of  depreciation,  both  physical  and  functional, 
that  has  taken  place  in  a  given  plant.    The  duty  of  the  accountant,  on 
the  other  hand,  is  to  provide  a  proper  reserve  fund  for  making  good  the 
ravages  caused  by  depreciation.     In  the  telephone  field,  however,  it  is 
usually  necessary  for  the  appraisal  engineer  to  keep  both  of  these  view- 
points constantly  in  mind." 

274.  Establishment  of  the  Depreciation  Reserve.  —  With  many 
of  the  larger  companies  the  problem  of  establishing  a  depreciation  reserve 
is  considered  strictly  an  engineering,  rather  than  an  accounting,  problem. 
In  other  words,  the  chief  engineer  decides  not  only  upon  the  depreciation 
of  the  plant,  but  also  determines  the  proper  method,  or  methods,  of  build- 
ing up  the  reserve  fund. 

"If  this  fundamental  difference  (the  difference  between  the  engineer's 
viewpoint  and  that  of  the  accountant)  is  kept  in  mind,"  says  Mr.  Thomas, 
"there  will  be  no  feeling  on  the  part  of  the  appraisal  engineer  that  the 
accountant  is  'depreciating'  the  plant  values  excessively;  nor  will  the 
accountant,  on  the  other  hand,  view  the  depreciation  made  by  the  ap- 
praiser as  grossly  inadequate. 

"Putting  the  proposition  in  a  mathematical  form,  let  x  equal  the 
amount  of  actual  depreciation  that  has  taken  place  and  y  the  amount 
of  increase  to  provide  a  reserve  fund  for  future  contingencies  and  replace- 
ment. The  function  of  the  appraiser  is  to  ascertain  the  value  of  x;  the 


DEPRECIATION  157 

function  of  the  accountant  is  to  take  x  and  determine  what  y  would  be. 
Manifestly  if  the  appraiser  terms  x  the  actual  depreciation,  and  the 
accountant  declares  that  x  plus  y  is  the  actual  depreciation,  they  will 
never  agree.  This  shows  that  there  should  be  a  careful  study  that  would 
lead  to  a  mutual  understanding  of  each  other's  views  of  depreciation,  so 
that  when  one  says,  'This  is  the  actual  depreciation,'  it  would  mean 
the  same  thing  to  both.  It  will  also  be  observed  by  this  formula  that  the 
accountant  is  dependent  upon  the  appraiser  in  order  to  know  the  amount 
of  x. 

"It  is  not  uncommon  to  hear  the  claim  made  that  the  plant  has  depre- 
ciated to  an  amount  represented  by  the  balance  to  the  credit  of  the  renewal 
fund.  Were  it  not  for  the  fact  that  many  engineers  are  following  the 
practice  of  using  so-called  standard  tables  in  estimating  present  deprecia- 
tion, deducing  in  proportion  to  the  age  of  the  plant,  it  would  seem  neces- 
sary to  treat  this  claim  seriously. 

275.  Accumulation  of  Depreciation  Reserve.  —  " The  establish- 
ment of  renewal  funds  through  '  depreciation '  annuities  can  be  likened  to 
the  accumulation  of  a  fire  insurance  fund  on  a  building.    A  building  that 
has  not  yet  burned  has  certainly  lost  none  of  its  value  by  reason  of  a 
fire  insurance  fund  existing  to  insure  it;   neither  has  a  plant  lost  value 
because  of  a  renewal  fund  that  exists  to  insure  its  gradual  or  final  replace- 
ment.   On  the  contrary,  the  fact  that  such  a  renewal  reserve  is  being 
maintained  is  the  strongest  argument  that  all  that  is  possible  is  being 
done  to  provide  against  impairment  of  investment  and  impairment  of 
efficiency. 

"It  is  obvious  that  the  renewal  fund  will  accumulate  faster  than  is 
really  necessary  in  the  earlier  years  of  a  plant's  history  because  the  replace- 
ments during  the  earlier  years  will  be  comparatively  few,  but  that  after 
a  number  of  years  the  expenditures  for  replacements  and  the  contributions 
to  the  funds  will  somewhat  more  nearly  balance  each  other. 

"It  is  evident  that  the  percentage  of  depreciation  that  would  show  the 
present  value  should  be  a  different  amount  from  the  percentage  used  to 
establish  a  renewal  fund.  Some  authorities  call  the  latter  'theoretical 
depreciation.'  It  might  better  be  termed  'safety-first  depreciation.' 

276.  Theoretical   and   Actual   Depreciation.  —  "Theoretical   de- 
preciation seldom,  if  ever,  works  out  in  practice  or  actual  experience,  for 
the  reason  that  it  assumes  a  gradual  constant  reduction  in  the  value  of 
property  during  its  life.     It  requires  no  argument  to  show  that  actual 
depreciation  does  not  occur  that  way.    The  so-called  'average  life'  of  a 
plant  complicates  the  problem  of  depreciation.     The  use  of  this  term 
creates  the  impression  that  the  plant  lives  to  the  term  set  by  the  average 
life  and  then  has  to  be  renewed  as  a  whole.    Nothing  could  be  farther 
from  the  truth.  -A  property  is  not  like  human  life;   no  mortality  table 


158        TELEPHONE  RATES  AND  VALUES 

applies.  Renewals  in  a  well-managed  going  concern  are  of  constant  occur- 
rence. The  plant  is  never  wiped  out  and  then  entirely  replaced  except  in 
the  event  of  some  calamity,  like  a  fire  or  tornado;  or,  if  it  is,  the  occasions 
are  very  rare  and  hardly  worth  consideration.  In  such  an  event  the  actual 
sound  value,  or  insurance  value,  should  be  sufficient  to  replace  it  in  as 
good  shape  as  it  was  when  the  catastrophe  occurred. 

"This  could  not  be  done  if  settlement  were  made  with  the  insurance 
companies  on  the  basis  of  depreciation  shown  by  'depreciation  reserve 
account/  This  is  not  saying  that  'theoretical  depreciation'  is  not  right 
for  its  purpose.  It  is  only  wrong  when  it  is  substituted  for  and  treated 
as  actual  depreciation.  On  the  other  hand,  it  is  as  wrong  to  take  only 
the  actual  depreciation  and  say  that  it  is  a  sufficient  amount  to  provide 
for  replacement.  Actual  depreciation  is  an  impairment  of  capital,  while 
the  additional  depreciation  is  a  provision  to  preserve  capital  intact. 

"Some  authorities  hold  that  it  makes  no  difference,  and  that  the  ap- 
praisal engineer  is  not  interested  in  the  purpose  for  which  the  valuation 
is  to  be  used.  So  far  as  ascertaining  the  reproduction  value  is  concerned 
this  is  true,  but  it  does  not  apply  to  the  percentages  that  are  deducted 
from  the  reproduction  value.  In  other  words,  the  expert  should  know  for 
what  purpose  his  depreciated  figures  are  to  be  used,  and  the  depreciated 
value  should  state  what  it  intended  to  show.  This  does  not  affect  'the 
basis  value  of  new  replacement/ 

"We  have  seen  that  a  percentage  deducted,  which  would  be  adequate 
for  the  actual  depreciation,  would  not  be  adequate  to  provide  a  renewal 
fund.  Again,  if  one  were  to  calculate  the  sales  value  of  a  certain  property 
to  be  removed  and  used  elsewhere,  he  would  be  face  to  face  with  certain 
peculiar  conditions.  The  appraiser  must  know  these  peculiar  conditions. 
To  illustrate:  The  removal  of  a  special  machine  to  some  other  place,  for 
use  in  connection  other  than  that  for  which  it  has  been  installed,  might 
necessitate  such  a  large  expenditure  for  modification  of  design  in  order 
to  make  it  useful  elsewhere  that  it  would  have  little  value  after  the  expense 
was  paid.  To  show  this  machine's  sales  value  would  necessitate  a  large 
percentage  of  deduction  from  its  value  to  a  going  concern  in  its  original 
place.  Manifestly  a  sufficiently  heavy  percentage  of  depreciation  to 
show  a  '  removal-sale  value '  would  be  absurd  to  use  as  the  actual  value  to 
a  going  concern. 

"If  one  terms  these  different  deductions  'depreciation,'  it  follows  that 
a  correct  method  of  estimating  depreciations  for  one  purpose  may  be  an 
incorrect  or  inadequate  method  to  apply  for  another  purpose. 

"A  wise  procedure  is  to  maintain  the  plant  in  efficient  condition  through 
repairs  and  minor  renewals  paid  from  current  income.  The  final  renewals 
are  made  as  required,  and  the  cost  debited  to  the  renewal  reserve  account. 
Each  year  there  is  debited  to  loss  and  gain,  and  credited  to  final  renewal 


•       DEPRECIATION  159 

reserve  account,  the  amount  indicated  by  the  estimate  based  upon  the 
expectation  of  life  of  the  several  units  of  the  plant. 

"It  is  important  that,  where  reserve  is  debited  on  account  of  liability 
for  future  renewals,  when  those  renewals  are  made  the  expenditure  therefor 
should  be  charged  against  renewal  reserve  account  and  not  against  the 
year's  operating  expense;  otherwise  the  reserve  would  be  building  up 
indefinitely,  and  the  loss  and  gain  account  would  show  faulty  conclusions." 

277.  Percentages  used  for  computing  Annual  Depreciation.  — 
The  question  of  the  annual  rate  which  should  be  used  in  building  up  the 
depreciation  reserve  of  telephone  properties  is  one  which  has  been  fre- 
quently considered  by  courts,  public  service  commissions,  and  other  in- 
vestigating bodies.  The  tabulation  which  follows  gives  the  result  of  the 
depreciation  percentages  assigned  by  courts  and  commissions  in  14  States 
and  the  Dominion  of  Canada. 

Practically  every  case  cited  is  a  rate  case,  where  the  question  was  at 
issue  as  to  the  reasonableness  of  existing,  or  proposed,  rates  for  telephone 
service.  In  considering  these  decisions  it  should  be  remembered  that 
it  is  only  natural  that  the  various  courts,  commissions  and  investigating 
committees  should  fix  the  rate  of  depreciation  at  a  minimum  reasonable 
figure,  in  order  that  the  public  might  have  the  benefit  of  the  lowest  reason- 
able rate  for  telephone  service. 

Board  of  Commissioners  of  Public  Utilities,  St.  John,  N.  B.,  Can.,  in  the  matter 
of  W.  Frank  Hatheway  et  al.  v.  New  Brunswick  Telephone  Co.,  Ltd.,  decided 
July  31,  1911:  "We  do,  however,  express  the  opinion  that  owing  to  the  compara- 
tively short  life  of  a  telephone  plant  as  a  whole,  that  reserve  .  .  .  should  not  be 
less  than  8  per  cent  of  the  plant  value.  ..." 

Board  of  Railroad  Commissioners  for  Canada,  Montreal,  in  the  matter  of  the 
application  of  the  corporation  of  the  city  of  Montreal  for  an  order  requiring  Bell 
Telephone  Company  of  Canada  to  reduce  its  exchange  rates  in  the  city  of  Montreal, 
decided  Oct.  28,  1912:  "The  Montreal  figures  are  Montreal  'experience  figures' 
which  are  stated  to  be  in  substantial  harmony  with  the  American  Bell  experience. 
After  due  consideration  it  does  not  appear  that  the  revised  percentage  of  6.77 
adopted  by  the  company  in  the  present  case  is  out  of  line." 

California  Railroad  Commission,  City  of  San  Jose  v.  Pacific  Telephone  &  Tele- 
graph Co.,  Case  No.  387,  decision  No.  1008,  decided  Oct.  9,  1913:  In  this  case  the 
company  claimed  6£  per  cent  for  depreciation.  The  commission  in  adopting  5| 
per  cent  said:  "I  therefore  will  suggest  5|  per  cent  depreciation  until  such  time 
as  actual  experience  has  determined  such  amount  is  too  high  or  too  low." 

The  Illinois  Public  Utilities  Commission  in  re  application  of  Moweaqua  Tele- 
phone Company  for  authority  to  increase  rates,  Case  No.  3357,  decided  April  28, 
1916,  made  an  allowance  of  7  per  cent  for  reserve  for  depreciation. 

In  re  application  of  Independent  Telephone  and  Telegraph  Company  of  Navoo 
for  an  increase  of  rates,  Case  No.  4834,  decided  Oct.  18,  1916,  the  Illinois  commis- 
sion held  that:  "A  charge  of  7.31  per  cent  of  the  reproduction  cost  new  of  the 
property  is  greater  than  necessary,  and  that  an  allowance  of  6  per  cent  of  the  re- 
production cost  new  of  the  depreciable  property,  as  determined  by  the  valuation 
of  the  commission's  engineers,  is  fair  and  reasonable." 


160        TELEPHONE  RATES  AND  VALUES 

Committee  on  Gas,  Oil  and  Electric  Light  of  the  city  council  of  Chicago,  report 
entitled  "Telephone  Service  and  Rates"  of  the  Committee  on  Gas,  Oil  and  Elec- 
tric Light  to  the  city  council  of  Chicago,  Sept.  3,  1907,  at  page  116:  "The  per- 
centage of  the  plant  cost  to  be  set  aside  each  year  for  a  reserve  for  depreciation, 
reconstruction  and  special  insurance  aggregates  8  per  cent.  Of  this,  the  deprecia- 
tion reserve  is  5f  per  cent  of  the  cost  of  the  plant." 

Report  on  the  investigation  of  the  Chicago  Telephone  Company,  by  William 
J.  Hagenah,  1911,  at  page  57:  "The  yearly  rate  of  depreciation  for  this  plant 
may  be  placed  at  5|  per  cent." 

The  Indiana  Public  Service  Commission,  in  the  case  of  W.  E.  Jones  et  al  v.  Con- 
nersville  Telephone  Co.,  Case  No.  1179,  decided  Aug.  11,  1916,  held:  "In  this 
case  we  are  of  the  opinion  that  a  depreciation  charge  of  5  per  cent  on  the  physical 
value  of  the  property  less  materials  and  supplies  would  be  a  reasonable  and  sufficient 
charge  for  the  item  of  depreciation." 

In  re  application  of  Citizens  Telephone  Company  of  Columbus,  Case  No.  1208, 
decided  July  1,  1916,  the  Indiana  commission  ordered  the  company  to  set  aside 
out  of  operating  revenues  a  depreciation  fund  equal  to  4  per  cent  on  a  valuation 
of  $105,000,  plus  the  actual  cost  of  betterments  and  extensions  thereafter  made. 

Analysis  of  rate  schedule  submitted  by  the  Missouri  &  Kansas  Telephone 
Company  to  the  city  of  Wichita,  Kans.,  May  29,  1911,  by  William  J.  Hagenah: 
"Applying  well-established  principles  for  this  determination,  it  would  appear  that 
an  annual  allowance  of  8  per  cent  on  the  reproduction  cost  new  of  the  depreciable 
property  when  placed  in  a  separate  reserve  would  permit  of  the  ultimate  replacement 
of  the  property." 

New  Orleans  Board  of  Trade,  Ltd.,  report  entitled  "Telephone  Conditions  in 
New  Orleans,  La.,"  by  a  special  committee  of  the  New  Orleans  Board  of  Trade, 
approved  April  8,  1908,  at  page  63:  "Depreciation:  .  .  .  7J  per  cent  of  the  total 
construction  account  chargeable  to  New  Orleans,  less  the  amount  actually  spent 
on  reconstruction.  .  .  .  Here  in  New  Orleans  in  1906  the  total  amount  set  side 
was,  as  stated  above,  7.5  per  cent;  approximately  3.5  per  cent  was  spent  on  re- 
construction and  4  per  cent  set  aside  for  depreciation." 

Maryland  Public  Service  Commission  of  Maryland,  in  the  matter  of  the  Chesa- 
peake &  Potomac  Telephone  Company  of  Baltimore  City,  Case  No.  38,  decided 
Dec.  30,  1911:  "We  also  think  that  for  property  of  this  character  the  allowance 
for  depreciation  should  be  about  6  per  cent  on  an  average." 

Massachusetts  Highway  Commission,  reports  of  Messrs.  D.  C.  &  Wm.  B.  Jack- 
son on  the  investigation  of  the  New  England  Telephone  &  Telegraph  Company 
concerning  its  property,  rates  for  service,  etc.,  March  27,  1909  (see  Mass.  Ry. 
Com.  Rpt.,  1909,  at  page  21):  "In  this  way  we  arrive  at  a  figure  for  the  average 
yearly  reconstruction  account  for  the  property  used  in  Massachusetts  business, 
which  is  equal  to  7.3  per  cent  of  the  value  of  such  property,  exclusive  of  land, 
general  supplies  and  working  capital." 

Nebraska  State  Railway  Commission,  in  the  matter  of  the  application  of  Rush- 
ville  Telephone  Company  for  authority  to  increase  its  rates,  application  No.  742 
April  12,  1910  (see  Neb.  State  Ry.  Com.  Rpt.,  1910,  at  page  228):  "Eight  per 
cent  is  a  reasonable  allowance  for  depreciation  on  an  exchange  of  the  size  and 
character  of  the  applicant." 

Board  of  Public  Utility  Commissioners  of  New  Jersey,  Gately  &  Hurley  Co., 
et  al.,  petitioners,  v.  the  Delaware  &  Atlantic  Telegraph  &  Telephone  Co.,  de- 
fendants, and  the  Board  of  Chosen  Freeholders  of  the  County  of  Camden,  peti- 
tioners, v.  the  Delaware  &  Atlantic  Telegraph  &  Telephone  Co.,  defendants,  de- 
cided Jan.  7,  1913:  The  company  in  its  defence  presented  figures  substantiating 
this  rate  of  depreciation  (6  per  cent),  and  the  same  was  approved  by  the  com- 


DEPRECIATION  161 

mission  with  the  following  statement:  "The  technical  apparatus  is  still  in  process 
of  change.  The  proper  allowances  for  depreciation  are  still,  of  necessity,  largely 
conjectural." 

New  York  Public  Service  Commission,  second  district,  application  of  the  Federal 
Telephone  and  Telegraph  Company  for  a  determination  of  just  and  reasonable 
charges  for  telephone  service  to  users  of  its  service  within  the  city  of  Buffalo  with- 
out regard  to  franchise  limitations,  decided  Aug.  4,  1914:  "Our  telephone  engineer, 
in  making  up  his  estimate  of  annual  depreciation  for  the  property  in  place,  arrives 
at  a  yearly  depreciation  of  $113,441.52.  Allowing  for  errors  in  his  computation, 
we  are  inclined  to  think  that  the  annual  report  estimate  of  depreciation  may  be 
properly  used  in  this  proceeding,  namely,  $132,200."  The  commission  found  the 
reproduction  cost  of  the  plant  to  be  $2,032,884.  The  amount  above  allowed  for 
depreciation  is  approximately  6|  per  cent  of  this  reproduction  cost. 

South  Dakota  Board  of  Railroad  Commissioners,  application  of  Dakota  Cen- 
tral Telephone  Company  for  authority  to  increase  its  rates  at  its  Waubay  ex- 
change, report  of  Commissioner  Robinson  (accepted  by  Board;  order  dated  June 
28,  1911)  (see  Bd.  of  R.  R.  Com'rs  of  S.  D.  Rpt.,  1911,  at  page  238):  "It  has 
seemed  to  your  commissioner  that  an  allowance  of  8  per  cent  for  depreciation 
account  was  a  fair  and  reasonable  one." 

Application  of  Dakota  Central  Telephone  Company  for  authority  to  increase 
the  rates  now  in  force  at  its  exchange  at  Summit,  S.  D.,  report  of  Commissioner 
Robinson  (accepted  by  Board;  order  dated  June  28,  1911)  (see  Bd.  of  R.  R. 
Com'rs  of  S.  D.  Rpt.,  1911,  at  page  250):  "Your  commissioner  also  finds  that  8 
per  cent  is  a  reasonable  allowance  for  depreciation." 

Application  of  Hawarden  Telephone  Company  to  increase  its  rates  at  its  Alcester 
exchange,  etc.,  report  of  Commissioner  Rice  (accepted  by  Board;  order  dated 
June  28,  1911)  (see  Bd.  of  R.  R.  Com'rs  of  S.  D.  Rpt.,  1911,  at  page  262):  "As  to 
the  percentage  that  should  be  allowed  for  depreciation,  .  .  .  the  commission 
...  is  of  the  opinion  that  such  a  plant,  newly  constructed,  depreciates  at  the 
rate  of  8  per  cent  per  year." 

The  South  Dakota  Railroad  Commission,  in  re  application  of  Dakota  Central 
Telephone  Company  for  increase  in  rural  rates,  Case  No.  F-247,  decided  April 
22,  1916,  allowed  an  amount  equal  to  7  per  cent  of  the  valuation  for  depreciation 
reserve. 

The  Wisconsin  Railroad  Commission,  in  the  case  of  Peter  B.  Bogart  et  al.  v. 
Wisconsin  Telephone  Co.,  Case  No.  U-524,  decided  April  18,  1916,  held  that  the 
fair  allowance  to  be  made  for  the  reserve  for  depreciation  is  not  less  than  5  per 
cent  of  the  cost  of  reproducing  the  property. 

In  re  application  of  Allenton  Kohlsville  Telephone  Company,  for  authority  to 
increase  rates,  Case  No.  U-541,  decided  May  10,  1916,  the  Wisconsin  commission 
allowed  a  depreciation  reserve  of  6£  per  cent.  The  commissioners,  in  their  opinion 
in  the  case,  state:  "We  are  of  the  opinion  that  5  per  cent  is  insufficient  to  provide 
for  depreciation  for  a  company  with  a  large  amount  of  overhead  rural  construc- 
tion. This  seems  to  be  particularly  true  in  the  case  of  a  small  company,  where  a 
single  severe  local  storm  may  destroy  a  large  portion  of  the  plant.  On  the  whole, 
we  doubt  if  much  less  than  7  per  cent  will  be  sufficient  to  provide  for  depreciation. 
For  the  purposes  of  this  case,  however,  we  will  assume  that  6|  per  cent  on  the 
cost  of  the  property  would  be  a  sufficient  allowance." 

The  following  rates  of  depreciation  have  been  set  or  approved  by  the  Wisconsin 
Railroad  Commission  for  various  telephone  plants :  — 

In  re  application  Wautoma  &  Mt.  Morris  Farmers  Telephone  Co.,  1911  (6 
W.  R.  C.  R.  419,  at  page  423),  81  per  cent. 

In  re  application  Troy  &  Honey  Creek  Telephone  Co.,  1911  (6  W.  R.  C.  R.  549, 
at  page  554),  81  per  cent. 


162        TELEPHONE  RATES  AND  VALUES 

In  re  application  of  Brooklyn  Telephone  Co.,  1911  (6  W.  R.  C.  R.  573),  8£  per 
cent. 

In  re  application  Peoples  Telephone  Co.,  1911  (8  W.  R.  C.  R.  92,  98),  8£  per 
cent. 

In  re  application  LaCrosse  Telephone  Co.,  1908  (2  W.  R.  C.  R.  546,  551),  7 
per  cent. 

Davis  et  al.  v.  Wisconsin  Telephone  Co.,  1909  (4  W.  R.  C.  R.  370,  380),  7  per 
cent. 

In  re  application  Costburg  Telephone  Co.  (4  W.  R.  C.  R.  407,  410),  7  per  cent. 

Columbus  Advancement  Association  v,  Wisconsin  Telephone  Co.,  1910  (4  W. 
R.  C.  R.  414,  420),  7  per  cent. 

In  re  application  Milton  &  Wilbur  Junction  Telephone  Co.,  1911  (6  W.  R.  C. 
R.  542,  at  page  544),  7  per  cent. 

In  re  application  Asaukee  Washington  Telephone  Co.,  1911  (7  W.  R.  C.  R. 
428,  at  page  433),  7  per  cent. 

In  re  application  Platteville  Rewey  &  Ellenboro  Telephone  Co.,  1911  (7  W.  R. 
C.  R.  608,  at  p.  617),  7  per  cent. 

In  re  application  of  Ettrick  Telephone  Co.,  1908  (2  W.  R.  C.  R.  358,  360),  8 
per  cent. 

In  re  application  of  People's  Telephone  Co.  of  Dane  County,  1908  (2  W.  R. 
C.  R.  518,  521),  8  per  cent. 

Tighe  et  al.  v.  Clinton  Telephone  Co.,  1908  (3  W.  R.  C.  R.  117,  127),  8  per 
cent. 

In  re  application  of  Lone  Rock  Telephone  Co.,  1909  (3  W.  R.  C.  R.  412,  415), 
8  per  cent. 

In  re  application  of  People's  Telephone  Co.  of  Dane  County,  1909  (3  W.  R. 
C.  R.  452,  456),  8  per  cent. 

In  re  application  Eleva  Farmer's  Telephone  Co.,  1911  (6  W.  R.  C.  R.  211,  at 
page  215),  8  per  cent. 

Payne  et  al.  v.  Wisconsin  Telephone  Co.,  1909  (4  W.  R.  C.  R.  1,  10),  8.98  per 
cent. 

In  re  application  of  Rhinelander  Mutual  Telephone  Co.,  1906  (2  W.  R.  C.  R. 
427,  431),  10  per  cent. 

In  re  application  of  Interurban  Telephone  Co.,  1910  (6  W.  R.  C.  R.  187,  190), 
10  per  cent. 

In  re  application  of  Interurban  Telephone  Co.,  1911  (6  W.  R.  C.  R.  647,  at 
page  653),  10  per  cent. 

In  re  application  Pewaukee-Sussex  Telephone  Co.,  1911  (7  W.  R.  C.  R.  465, 
at  page  470),  7  per  cent. 

United  States  Circuit  Court,  WTestern  District  of  Kentucky,  Cumberland  Tele- 
phone &  Telegraph  Co.  v.  city  of  Louisville,  Opinion,  at  page  32:  "We  have  con- 
cluded .  .  .  that  a  reasonable  amount  to  be  set  apart  in  this  climate  for  making 
good  depreciations  is  7  per  cent  of  the  value  of  the  company's  plant,  exclusive  of 
real  estate,  working  capital  and  supplies  on  hand." 

Supreme  Court  of  the  State  of  Oklahoma,  Pioneer  Telephone  &  Telegraph 
Co.,  V.  E.  H.  Westenhaver  et  al.  and  the  State  of  Oklahoma,  Opinion,  at  page  32: 
"We  think,  under  the  evidence  in  this  case,  that  7  per  cent  of  the  reproductive 
value  of  the  physical  property  is  fair  and  sufficient  to  allow  for  annual  depreciation." 

The  rates  of  depreciation  as  given  in  the  foregoing  tabulation  are 
interesting  for  purposes  of  comparison.  However,  the  proper  way  to 
determine  the  amount  which  should  be  set  aside  in  the  reserve  fund  for 
depreciation  each  year  is  to  analyze  each  case  by  itself. 


.       DEPRECIATION  163 

278.  Items  considered  in  setting  up  Reserve  Fund.  —  In  setting 
up  a  reserve  fund  for  the  replacement  of  any  individual  item  of  plant 
there  are  three  items  which  must  be  considered:  — 

1.  The  probable  total  cost  of  replacing  the  item  at  the  end  of  its  useful 
life. 

2.  The  estimated  life  in  years. 

3.  The  estimated  net  scrap,  or  junk,  value  at  the  end  of  the  useful  life. 

279.  Estimated  Life  and  Reproduction  Costs.  —  Quite  obviously 
it  is  out  of  the  question  to  accurately  estimate  the  cost  of  replacing  any 
item  of  plant  at  a  future  date.    The  best  we  can  do  is  to  determine  the 
reproduction  cost  as  of  the  date  under  consideration,  and  assume  that  it 
will  probably  cost  about  the  same  amount  to  replace  the  item  in  question 
at  the  end  of  its  useful  life. 

The  same  statement  applies  to  the  scrap  or  junk  value.  We  cannot  tell 
how  much  a  given  item  of  plant  will  sell  for  as  scrap  ten  years  hence,  but 
we  can  determine  the  scrap  value  at  the  present  time.  Furthermore,  we 
can  determine  the  ratio  of  the  scrap  value  to  the  reproduction  cost  at  the 
present  time.  This  ratio  probably  will  remain  about  the  same. 

Therefore,  if  we  know  the  reproduction  cost  of  any  element  of  plant,  the 
ratio  of  the  scrap  value  to  the  reproduction  cost,  and  the  life  in  years,  we 
can  determine  the  amount  in  dollars  which  should  be  set  aside  each  year 
to  replace  the  plant  at  the  end  of  its  useful  life. 

To  make  this  statement  a  little  clearer,  let  us  again  consider  the  aerial 
cable  illustration.  The  reproduction  cost  is  assumed  to  be  $1,000,  the 
life  in  years  at  ten  years,  and  the  ratio  of  scrap  value  to  the  reproduction 
cost,  30  per  cent,  or  $300  in  this  case.  It  will  be  remembered  that  the 
aerial  cable  under  consideration  cannot  depreciate  below  a  value  of  $300, 
the  net  scrap  value.  The  wearing  value,  however,  of  $700  will  diminish 
at  the  rate  of  $70  a  year,  giving  a  depreciation  of  $700  in  ten  years.  The 
$70,  then,  represents  the  annual  rate  of  depreciation  in  the  case  under 
consideration. 

280.  Composite  Annual  Rate  of  Depreciation.  —  If  we  analyze 
each  element  of  a  telephone  property  by  the  method  suggested  in  the  fore- 
going illustration,  it  is  a  comparatively  easy  matter  to  build  up  a  composite 
annual  rate  of  depreciation  which  will  apply  to  the  property  as  a  whole. 

In  making  a  study  of  this  kind  it  is  first  necessary  to  determine  the 
average  age,  the  ratio  of  the  scrap  value  to  reproduction  cost,  and  the 
resulting  depreciation  rate  per  year,  of  the  various  items  of  property. 
Fig.  50  represents  a  rather  complete  analysis  of  these  various  factors  made 
recently  by  one  of  the  largest  telephone  companies  in  the  country,  located 
in  the  Middle  West.  The  figures  given  in  this  table  are  exceedingly 
interesting  inasmuch  as  they  represent  the  best  judgment  of  the  engineering 
and  maintenance  forces  of  this  company. 


16-i 


TELEPHONE  RATES  AND  VALUES 


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DEPRECIATION  165 

It  will  be  noted  that  estimates  of  these  various  factors  were  made  for 
three  different  States;  that  these  figures  were  averaged;  and  that  sub- 
sequently the  engineers  of  the  company,  after  going  over  all  of  the  data 
submitted  to  the  conference,  determined  what  seemed  to  them  to  be  a 
fair  allowance  for  use  as  applicable  to  the  company's  property  as  a  whole. 

A  brief  discussion  of  the  various  plant  items  as  included  in  Fig.  50 
may  prove  of  interest.  In  reviewing  this  discussion  it  should  be  borne  in 
mind  that  the  author  is  not  cognizant  of  the  reasoning  adopted  by  the 
men  who  made  up  the  table,  but  is  merely  discussing  it  from  the  general 
viewpoint  of  the  telephone  engineer. 

281.  Exchange  Pole  Lines.  —  It  will  be  noted  that  the  average  life 
in  years  of  the  exchange  pole  lines  is  given  as  10.4  years,  and  the  life  in 
years  as  recommended  by  the  engineering  force  is  twelve  years.    As  a 
matter  of  fact,  exchange  pole  lines,  if  considered  from  a  standpoint  of 
physical  depreciation  only,  have  an  average  life  of  from  sixteen  to  twenty 
years,  depending  upon  soil  conditions. 

In  arriving  at  a  fair  life  of  twelve  years,  the  author  assumes  that  the 
company's  engineers  have  made  an  allowance  for  functional  depreciation. 
It  is  easy  to  see  how  this  factor  of  functional  depreciation  might  materially 
shorten  the  average  life  of  a  company's  pole  plant.  Take,  for  instance, 
the  case  of  a  plant  where  the  average  pole  life,  through  physical  causes 
alone,  is  found  to  be  eighteen  years.  If  a  strict  record  of  the  history  of  the 
company's  poles  is  maintained  it  will  probably  be  found  that  a  large 
percentage  of  the  poles  which  otherwise  would  have  a  life  of  eighteen 
years  are  removed  five  or  ten  years  after  their  installation  because  of  city 
ordinances  demanding  the  removal  of  poles  from  specific  streets,  or  due 
to  unusual  subscriber  growth  in  certain  directions  requiring  the  abandon- 
ment of  aerial  construction  in  favor  of  underground  construction. 

The  salvage  value  in  the  case  under  consideration  is  given  at  0  per 
cent.  Obviously  poles  which  have  lived  their  useful  life  have  little  or  no 
salvage  value.  Occasionally,  of  course,  poles  which  are  retired  from 
service  because  of  functional  depreciation  may  be  of  some  value;  they 
may  either  be  reset  as  shorter  poles,  or  they  may  be  sawed  up  into  anchor 
logs.  Usually  it  is  found  that  the  value  of  plant  reclaimed  in  this  way 
about  offsets  the  cost  of  removals.  Therefore  a  zero  salvage  value  for  the 
pole  plant  as  a  whole  is  not  far  out  of  the  way. 

The  yearly  depreciation  rate,  it  will  be  noted,  ranges  from  9.6  per  cent 
as  the  composite  rate  for  the  three  States  to  8.3  per  cent  as  the  engineering 
department's  estimate.  It  will  be  noted  that  these  figures  correspond, 
respectively,  to  an  average  life  of  10.4  years  and  zero  salvage  value,  and 
the  average  life  of  twelve  years  and  zero  salvage  value. 

282.  Exchange    Distribution   Wire.  —  Exchange  distribution  wire, 
or  drop  wire  as  we  have  termed  it  in  this  series,  is  given  an  average  life  of 


166        TELEPHONE  RATES  AND  VALUES 

approximately  six  years.  Here  again  functional  depreciation  plays  an 
active  part.  Obviously  drop  wire,  if  considered  entirely  independent  of 
functional  depreciation,  would  have  an  average  life  of  appreciably  more 
than  six  years.  However,  any  one  who  is  familiar  with  operating  con- 
ditions in  telephone  properties  realizes  that  the  actual  average  life  of 
subscribers'  drop  wire  is  rarely  over  six  years. 

There  are  many  factors  which  tend  to  decrease  the  life  of  drop  wire 
from  functional  causes.  It  is  the  practice  of  most  operating  telephone 
companies  to  periodically  clean  up  the  dead  drops;  i.e.,  if  a  telephone  is 
removed  from  a  house,  and  no  subsequent  application  for  service  is  made 
within  a  reasonable  length  of  time,  most  companies  deem  it  advisable  to 
remove  the  drop  wire. 

283.  Salvage  and  Depreciation  of  Exchange  Distribution  Wire.  - 
It  will  be  noted  that  the  exchange  distribution  wire,  or  drop  wire  (Fig. 
50),  is  given  a  zero  salvage  value.    This  means  that  the  company  estimates 
that  sufficient  return  will  be  derived  from  the  drop  wire  as  a  whole  to  about 
offset  the  cost  of  removals.    In  other  words,  allowance  is  made  for  the 
recovery  of  a  part  of  the  drop  wire  in  a  condition  permitting  re-use. 

The  annual  depreciation  rate  percentages  vary  from  15.4  to  20,  an 
average  of  16.5  per  cent  for  the  three  States  (Fig.  50).  The  engineering 
department  has  raised  this  average  slightly  to  16.6. 

In  considering  the  figures  given  in  Fig.  50  for  exchange  distribution 
wire,  —  and,  for  that  matter,  for  all  of  the  other  items,  —  it  should  be 
remembered  that  while  they  represent  a  careful  analysis  of  the  conditions 
met  with  by  one  company  operating  in  the  Middle  West,  they  may  not 
be  applicable  to  the  individual  requirements  of  all  of  the  readers  of  this 
article.  Each  case,  of  course,  should  be  carefully  analyzed  by  itself. 

284.  Exchange  Bare  Wire.  —  The  exchange  bare  wire  —  and  by  bare 
wire  is  meant  the  uninsulated  wire  as  found  on  the  distribution  pole  lines  — 
is  given  a  life  ranging  from  6.5  years  in  State  A  to  8.7  years  in  State  C, 
an  average  for  the  three  States  of  7.1.    It  will  be  noted  that  the  engineers 
have  raised  the  average  life  of  the  three  States  to  8.    Evidently  little  or 
no  copper  wire  is  used  by  the  company  under  consideration,  otherwise 
both  life  and  salvage  value  would  be  appreciably  higher.     Copper  wire, 
of  course,  has  a  very  high  salvage  value. 

In  the  case  of  the  exchange  bare  wire,  functional  depreciation  again 
plays  an  important  part.  Obviously,  the  life  of  bare  iron  wire,  if  affected 
only  by  physical  depreciation,  is  considerably  over  eight  years.  The 
writer  recently  appraised  a  telephone  plant  where  the  major  portion  of 
the  bare  iron  wire  had  been  in  service  twelve  years  and  was  found  to  be 
in  good  condition,  —  in  fact,  in  such  good  condition  that  it  will  probably 
last  four  or  five  years  longer.  However,  in  this  case  an  excellent  grade  of 
galvanized  wire  had  been  used,  and  the  climatic  conditions  had  not  been 
unusually  severe. 


DEPRECIATION  167 

285.  Salvage  Value  of    Bare   Iron   Wire.  —  Obviously,  bare  iron 
wire  has  no  salvage  value.    Of  course  there  may  be  isolated  cases  where 
iron  wire  is  removed  from  functional  causes  shortly  after  its  installation, 
and  a  part  of  it  re-used.    Cases  of  this  kind  are  exceptional,  however,  due 
to  the  high  cost  of  removing  and  rehandling  bare  iron  wire. 

It  will  be  noted  that  a  negative  salvage  value  has  been  assigned  to  the 
iron  wire.  This  negative  salvage  value  represents  the  cost  —  expressed 
in  terms  of  the  original,  or  reproduction,  cost  —  of  removing  the  wire. 
In  other  words,  iron  wire  which  has  lived  its  useful  life  is  a  liability  to 
an  operating  telephone  company  rather  than  an  asset.  The  negative 
salvage  values  range  from  16  to  5.7,  an  average  for  the  three  States  of 
13.  The  engineers  have  allowed  a  negative  salvage  value  of  15.  This, 
in  the  author's  opinion,  is  a  little  high,  as  the  cost  of  removing  bare  iron 
wire  usually  ranges  from  10  to  13  per  cent  of  the  first  cost  in  service. 

The  annual  rate  of  depreciation  ranges  from  12.2  to  17.8,  an  average  of 
15.9  for  the  three  States.  The  engineers  have  reduced  this  average  to 
14.4. 

286.  Exchange  Iron  Wire,  Composite.  —  For  convenience  in  con- 
sidering the  wire  plant  as  a  whole,  the  company  under  consideration  has 
included  in  its  table  an  analysis  of  the  annual  depreciation  of  the  composite 
wire  plant,  including  both  line  wire  and  drop  wire.    The  average  figures 
for  the  three  States  are:  — 

Life,  6.7  years;  net  salvage  value  minus  8  per  cent  of  the  first  cost;  and 
yearly  depreciation  in  per  cent,  16.2. 

The  corresponding  allowances  made  by  the  engineering  department  are 
7.2  minus  9.2  and  15.2,  respectively. 

287.  Functional  Depreciation  of  Exchange   Aerial  Cable.  —  It 
is  interesting  to  note  that  the  conferees  were  unanimous  in  selecting 
twelve  years  as  the  average  life  for  exchange  aerial  cable.    The  term  aerial 
cable,  as  here  used,  includes  not  only  the  cable  proper,  but  also  messenger 
strand,  terminal  boxes,  pole  sites  and  the  bridle  wire. 

Obviously,  if  the  aerial  cable  only  were  considered,  it  would  have  an 
average  life,  if  influenced  by  physical  depreciation  alone,  of  appreciably 
more  than  twelve  years.  In  some  instances  aerial  cable  installations  have 
been  known  to  last  twenty  or  twenty-five  years.  However,  the  inclusion 
of  the  aerial  cable  auxiliary  equipment  tends  to  materially  shorten  the 
average  life,  as  does  also  the  consideration  of  functional  depreciation. 
We  have  all  known  of  cases  where  aerial  cables,  in  perfect  condition, 
have  been  removed  two  or  three  years  after  their  original  installation. 
This  may  be  due  to  the  passage  of  municipal  ordinances  requiring  the 
removal  of  the  overhead  type  of  distribution  from  specific  streets,  or  due 
to  rapid  subscriber  growth,  necessitating  the  construction  of  an  under- 
ground cable  plant,  or  due  to  other  causes. 


168        TELEPHONE  RATES  AND  VALUES 

An  excellent  illustration  of  the  effect  of  functional  depreciation  upon 
the  life  of  aerial  cable  is  to  be  found  in  the  history  of  the  New  York  Tele- 
phone Company.  About  ten  years  ago  this  company  built  extensive 
aerial  cable  distribution  systems  in  several  of  the  outlying  sections  of 
the  borough  of  Brooklyn.  Shortly  thereafter  the  city  fathers  passed 
ordinances  creating  restricted  areas,  and  ordered  the  removal  of  all  electric 
light  and  telephone  poles  from  the  city  streets. 

In  another  section  of  the  same  borough  an  extensive  aerial  cable  dis- 
tribution system  had  to  be  junked  within  two  years  after  its  original 
installation,  due  to  the  extraordinarily  rapid  subscriber  growth.  The 
rumor  of  a  proposed  extension  of  a  rapid  transit  subway  system  into  this 
section  of  the  city  caused  an  unprecedented  building  development,  and 
the  telephone  company  found  it  necessary  to  provide  from  300  to  600 
cable  pairs  per  block  in  a  territory  where  from  25  to  50  pairs  per  block  had 
previously  sufficed. 

288.  Salvage  Value  and  Depreciation  Rate  of  Exchange  Aerial 
Cable.  —  The  salvage  value  in  per  cent  of  the  first  cost  ranges  from  20 
in  State  B  to  33  in  State  C,  an  average  for  the  three  States  of  28.    This 
latter  figure  was  adopted  by  the  engineers. 

A  net  salvage  value  of  28  per  cent  of  the  first  cost  installation  is  certainly 
conservative.  As  a  rule,  it  will  be  found  that  the  salvage  value  ranges  from 
30  to  33  per  cent. 

The  average  annual  depreciation  rate  for  the  three  States  was  6  per 
cent  and  this  figure  was  accepted  by  the  staff  of  the  chief  engineer. 

289.  Exchange  Underground  Main  Cable.  —  By  exchange  under- 
ground main  cable  is  meant  the  cable  in  the  main  conduit  lines.    The  life 
as  given  in  the  table  ranges  from  sixteen  to  twenty  years,  an  average  of 
18.2  years  for  the  three  States.    Twenty  years  has  been  adopted  by  the 
engineering  force.    An  average  life  of  twenty  years  is  conservative  for  a 
company  of  the  size  of  the  one  under  consideration.    In  the  smaller  plants 
underground  cables  frequently  have  an  active  life  of  over  twenty-five 
years. 

The  factor  of  functional  depreciation  does  not  play  as  large  a  part  in 
the  case  of  main  underground  cable  as  it  does  in  the  case  of  the  items 
previously  discussed.  However,  most  of  the  larger  companies  often  have 
occasion  to  retire  underground  cables  from  service,  due  to  the  fact  that 
they  have  become  inadequate  to  care  for  the  needs  of  the  territory  served. 

The  salvage  value  of  38  per  cent  of  the  reproduction  cost,  or  cost  new, 
seems  reasonable,  although  there  is  ample  precedent  for  a  salvage  allowance 
as  high  as  40  per  cent.  The  annual  rate  of  depreciation  as  given  in  Fig. 
50  ranges  from  3  to  3.9,  or  an  average  of  3.4  per  cent  for  the  three  States. 
It  will  be  noted  that  the  engineering  department  has  reduced  this  figure 
to  3.1. 


DEPRECIATION  169 

290.  Exchange    Subsidiary    Cable.  —  Subsidiary   cable,   or   lateral 
cable  as  it  is  more  often  called,  is  given  an  average  life  of  12.2  years.    The 
engineering  department  has  increased  this  life  to  thirteen  years.    It  will 
be  noted  that  the  average  life  allowed  by  the  engineering  department  for 
subsidiary  cable  is  seven  years  less  than  that  allotted  to  the  main  under- 
ground cable.    The  reason  for  this  will  be  apparent. 

Subsidiary  cables,  while  they  have  about  the  same  life  from  physical 
causes  as  main  underground  cable,  frequently  have  to  be  removed  from 
service  long  before  they  have  become  defective,  due  to  functional  causes. 
Changes  in  distribution  requirements  often  necessitate  the  abandonment 
of  laterals  to  street  poles  in  favor  of  subsidiaries  built  to  the  interior  of 
city  blocks.  Again,  changes  in  street  grades  and  alterations  in  electric 
light  conduit  lines,  water  mains,  etc.,  may  necessitate  the  redistribution  of 
a  telephone  company's  lateral  cable  facilities. 

The  salvage  value  allotted  to  subsidiary  cable  by  the  engineering  de- 
partment —  28  per  cent  of  the  first  cost  —  seems  a  little  low.  The  fact 
that  it  is  10  per  cent  lower  than  the  salvage  value  assigned  to  the  main 
underground  cable  is  probably  due  to  an  attempt  to  make  allowance  for 
the  occasional  abandonment  of  subsidiary  or  lateral  cables.  Most  operat- 
ing companies  experience  cases  of  this  kind.  It  sometimes  happens  that 
a  lateral  cable  placed  in  a  small  bore  subsidiary  duct  becomes  "frozen" 
to  the  duct,  and  has  to  be  abandoned  entirely. 

The  average  annual  depreciation  rate  for  subsidiary  cable  is  given  as 
5.9,  and  this  allowance  has  been  reduced  to  5.5  by  the  engineering  depart- 
ment. 

291.  Exchange     Underground     Cable,     Composite.  —  For    con- 
venience in  considering  the  cable  plant  as  a  whole,  the  life,  salvage  value 
and  annual  depreciation  rate  for  the  composite  underground  cable  plant, 
including  both  main  and  subsidiary  cables,  have  been  included  in  the 
table.    The  figures,  it  will  be  noted,  fall  about  midway  between  the  respec- 
tive allowances  made  for  main  and  subsidiary  cables. 

292.  Exchange  Underground  Main  Conduit.  —  The  average  life 
of  the  main  conduit  has  been  given  at  47.6  years,  and  this  allowance  has 
been  reduced  by  the  engineering  department  to  45.    Doubtless  no  one 
knows  the  actual  life  of  a  modern  well-built  conduit  system.    In  all  proba- 
bility it  will  average  well  up  towards  one  hundred  years.    However,  ex- 
change underground  conduit,  as  here  considered,  includes  the  manholes. 
Manholes  occasionally  have  to  be  abandoned  or  rebuilt  to  provide  for 
changes  in  water  or  electric  light  distribution  systems. 

It  is  also  true  that  functional  depreciation  plays  a  small  part  in  the  case 
of  exchange  underground  conduit.  Changes  in  street  level  are  sometimes 
responsible  for  the  abandonment  of  several  blocks  of  conduit  system, 
necessitating  the  building  of  a  new  subway  at  a  higher  level.  In  New 


170        TELEPHONE  RATES  AND  VALUES 

York  City  the  New  York  Telephone  Company  has  lost  many  blocks  of 
underground  conduit,  due  to  the  construction  of  the  various  rapid  transit 
subway  systems. 

A  zero  salvage  value  has  been  assigned  to  underground  conduit  for 
obvious  reasons.  A  conduit  system  has  no  salvage  value  when  it  has 
lived  its  useful  life,  and  there  is  no  cost  of  removal  to  create  a  negative 
salvage  value,  as  in  the  case  of  exchange  bare  iron  wire. 

293.  Exchange  Subsidiary  Conduit. —  It  will  be  noted  that  the 
life  of  the  exchange  subsidiary  conduit,  Fig.  50,  as  assigned  by  the  engineer- 
ing department,  is  twenty-nine  years  shorter  than  the  life  assigned  to  the 
exchange  main  conduit.    This  is  due  to  the  fact  that  exchange  subsidiary 
conduit  —  or  lateral  conduit,  as  we  know  it  —  frequently  has  to  be  aban- 
doned in  the  process  of  redistributing  the  underground  system  to  meet 
new  requirements  in  a  company's  subscriber  growth  or  for  other  reasons. 
For  obvious  reasons,  as  in  the  case  of  the  exchange  main  conduit,  exchange 
subsidiary  conduit  has  been  given  a  zero  salvage  value. 

294.  Exchange,  Conduit,  Composite.  —  For  purposes  of  convenience 
another  set  of  figures  has  been  included  in  Fig.  50  showing  the  average 
life,  average  salvage  value  and  average  yearly  depreciation  rate  for  the 
conduit  plant  as  a  whole,  including  both  main  and  subsidiary  conduit. 

A  study  of  this  nature  is  often  very  useful  in  estimating  the  annual 
charges  for  a  bit  of  underground  plant.  Assume,  for  instance,  that  the 
manager  of  a  telephone  plant  has  been  notified  by  city  authorities  that  a 
portion  of  a  certain  street  is  to  be  paved  with  asphalt  within  a  compara- 
tively short  time.  Assume,  further,  that  the  manager  finds  he  will  ulti- 
mately require  conduit  under  the  street  it  is  proposed  to  pave,  but  that 
under  ordinary  circumstances  he  could  defer  its  construction,  thus  post- 
poning the  additional  plant  investment  for,  say,  three  years.  Of  course, 
if  he  does  postpone  the  conduit  construction  until  after  the  pavement  has 
been  laid  he  will  be  put  to  the  additional  expense  of  trenching  through, 
and  replacing,  the  asphalt  pavement. 

Confronted  with  circumstances  such  as  these  the  manager  naturally 
wishes  to  know  whether  or  not  the  annual  charges  for  three  years  on  an 
idle  subway  will  more  than  offset  the  additional  cost  of  building  through 
an  asphalt  pavement. 

By  multiplying  the  cost  of  the  subway  now,  placed  before  the  building 
of  the  pavement,  by  the  sum  of  the  annual  charges,  expressed  in  per  cent, 
he  will  obtain  the  amount  in  dollars  that  the  idle  subway  will  cost  him 
a  year,  and  that  figure  multiplied  by  3  will  give  the  total  cost  of  the  sub- 
way for  the  three-year  period.  Obviously,  if  this  sum  is  appreciably 
less  than  his  estimate  of  the  cost  of  building  a  similar  subway  through 
asphalt  pavement  he  will  decide  in  favor  of  immediate  construction. 

The  annual  charges  to  be  considered  in  a  case  of  this  kind  are :  — 


DEPRECIATION  171 

1.  Yearly  depreciation  expressed  in  per  cent  of  reproduction  cost. 

2.  Yearly  interest  expressed  in  per  cent  of  reproduction  cost. 

3.  Yearly  taxes  expressed  in  per  cent  of  reproduction  cost. 

4.  Yearly  maintenance  cost  expressed  in  per  cent  of  reproduction  cost. 

295.  Annual  Charges  on  Exchange  Conduit.  —  The  depreciation 
rate  per  year  would  be  obtained  from  a  table  such  as  the  one  under  dis- 
cussion, and  the  annual  rate  selected  would  be  in  such  form  as  to-  be 
applicable  to  both  main  conduit  and  subsidiary  conduit;  in  other  words, 
it  would  be  a  composite  rate.    The  interest  rate  is  usually  taken  at  6  per 
cent  at  least  in  a  rough  estimate  of  this  kind. 

In  computing  annual  charges  some  of  the  larger  companies,  to  be  con- 
servative, use  an  interest  rate  somewhat  less  than  6  per  cent.  The  tax 
and  maintenance  percentages  would  have  to  be  approximated  by  the 
manager,  in  the  instance  under  discussion,  unless  he  happened  to  have 
sufficient  data  available  to  permit  a  more  accurate  estimate.  Perhaps 
a  conservative  allowance  for  approximate  estimate  purposes  for  the  items 
taxes  and  maintenance  is  1^  and  3  per  cent  respectively.  The  total  annual 
charges  in  the  case  would,  then,  become  13.2  per  cent. 

296.  Exchange  Submarine  Cable.  —  Obviously,  the  company  that 
compiled  Fig.   50  does  not  make  extensive  use  of  submarine   cable. 
It  will  be  noted  that  no  figures  are  given  for  States  B  and  C.     Quite 
naturally,  submarine  cable  is  almost  a  negligible  item  of  plant  equipment 
in  most  of  the  companies  operating  in  the  Middle  West.    In  the  case  of  the 
coast  companies,  however,  it  is  a  most  important  item.    In  and  around 
New  York  City  the  use  of  submarine  cables  across  the  various  bays  and 
rivers  is  extensive.    Incidentally  it  may  be  said  that  the  submarine  main- 
tenance problems  confronted  by  the  New  York  Telephone  Company 
are  very  real  ones. 

In  State  A  the  life  of  a  submarine  cable  has  been  given  at  ten  years.  At 
first  thought  a  life  of  ten  years  for  submarine  cable  as  compared  with  the 
lives  already  given  for  aerial  cable,  main  and  subsidiary  underground 
cable,  may  seem  short.  Any  one  who  has  come  into  intimate  contact  with 
problems  involving  the  maintenance  of  a  submarine  cable  plant,  however, 
will  realize  that  there  are  many  factors  involved  in  the  life  of  a  submarine 
cable  besides  those  arising  from  physical  causes.  Especially  is  this  true 
in  the  case  of  submarine  cables  across  shallow  bodies  of  water. 

Although  submarine  cables  are  heavily  protected  by  steel  armor, 
nevertheless,  they  are  frequently  subjected  to  mechanical  injury.  Despite 
all  precautions  that  may  be  taken  by  a  telephone  company,  boatmen 
seem  particularly  prone  to  cast  anchor  in  the  vicinity  of  the  submarine 
cable,  and  they  frequently  haul  away  part  of  it  when  they  weigh  anchor. 
Some  of  the  readers  of  this  article  may  have  noticed  numerous  signs 
posted  in  the  New  Jersey  "Flats"  just  outside  of  Jersey  City,  bearing 
this  inscription:  "Submarine  cable!  Do  not  anchor." 


172  TELEPHONE  RATES  AND  VALUES 

A  life  of  ten  years,  then,  for  submarine  cable,  while  it  may  be  a  little 
low,  is  conservative,  and  conservatism  is  the  best  policy  to  be  followed  in 
the  determination  of  any  factor  which  has  a  direct,  or  even  an  indirect 
bearing  upon  depreciation. 

297.  Salvage  Value  of  Submarine  Cable.  —  It  will  be  noted  that  a 
zero  salvage  value  has  been  assigned  to  the  submarine  cable.    Here  again 
the  company  is  evidently  conservative.    Of  course,  if  a  submarine  cable 
is  to  be  replaced  because  it  is  worn  out,  or  because  it  has  become  inadequate 
by  another  reason,  it  is  possible  to  recover  the  old  cable  —  by  the  use  of 
a  proper  rigging  on  the  floats  —  for  scrap  purposes. 

With  the  present  high  metal  prices  one  would  be  warranted  in  going  to 
quite  a  little  expense  to  fish  up  a  defunct  submarine  cable.  However, 
many  cases  arise  where  it  is  well-nigh  impossible  to  effect  the  recovery 
of  a  submarine  cable  after  it  has  lived  its  useful  life. 

Inasmuch  as  the  life  has  been  taken  at  ten  years  and  the  salvage  value 
at  zero,  the  annual  rate  of  depreciation,  on  the  straight  line  basis,  becomes 
10  per  cent,  as  shown  in  the  table. 

298.  Exchange  Right  of  Way.  —  The  life  of  right  of  way  is  naturally 
rather  difficult  to  determine.     One  way  of  attacking  the  problem  is  to 
assume  that  right  of  way  has  the  same  average  life  as  have  the  poles  with 
which  it  is  associated.     The  underlying  theory  in  this  case  is  that  if  a 
pole  has  to  be  replaced,  the  right  of  way  for  that  pole  will  have  to  be 
renewed.    Undoubtedly  this  is  true  in  a  good  many  cases. 

The  writer  knows  of  an  instance  where  a  large  territory  is  served  from 
pole  lines  placed  within  city  blocks.  The  blocks  in  this  district  do  not 
contain  alleys,  and  all  of  the  poles  are  therefore  located  on  private  right 
of  way.  Right  of  way  permits  for  the  original  poles  were  secured  many 
years  ago,  and  the  company  owning  the  system  finds  that  nearly  every 
time  a  pole  has  to  be  replaced  the  owner  of  the  property  where  the  pole  is 
located  either  demands  the  removal  of  the  pole  entirely,  or  makes  a  plea  for 
compensation  for  allowing  the  company  to  replace  it.  As  a  rule,  this 
has  not  been  due  to  any  annoyance  caused  in  replacing  the  pole,  but 
rather  to  the  fact  that  the  property  owner,  often  a  new  one,  had  the 
existence  of  the  pole  called  specifically  to  his  attention  by  the  presence 
of  the  pole  gang,  and  thought  it  was  a  good  time  to  take  the  matter  up 
with  the  company. 

While  it  is  undoubtedly  true  that  the  life  of  the  poles  associated  with  a 
parcel  of  right  of  way  does  have  some  effect  upon  the  life  of  the  right  of 
way,  we  are  probably  warranted  in  the  assumption  that  the  average  life 
of  right  of  way  for  a  telephone  property  is  appreciably  longer  than  the 
average  pole  life. 

The  engineering  department  obviously  took  this  view  in  determining 
the  life  of  right  of  way,  as  given  in  Fig.  50  under  discussion.  It  will  be 


DEPRECIATION  173 

noted  that  the  life  of  the  exchange  right  of  way  is  given  at  eighteen  years 
as  compared  with  the  life  of  twelve  years  for  the  exchange  pole  lines. 
However,  it  must  be  remembered  that  the  item  "Exchange  Pole  Lines," 
as  here  given  comprises  not  only  the  poles  themselves,  but  also  the  auxiliary 
cross  arm  and  guy  equipment. 

For  obvious  reasons  right  of  way  has  no  salvage  value,  and  the  annual 
depreciation  percentages  as  given  in  Fig.  50  are  therefore  the  reciprocals 
of  the  corresponding  lives. 

299.  Depreciation    of   Land.  —  For  obvious  reasons  land  does  not 
depreciate  in  the  sense  that  we  have  been  using  the  term  "  depreciation." 
In  other  words,  land  is  something  that  cannot  wear  away,  or  undergo  a 
lessening  value,  from  physical  causes.    It  is  true,  however,  that  the  value 
of  land  does  depreciate  and  also  that  a  parcel  of  land  used  by  a  telephone 
company  may  become  inadequate  to  serve  the  purpose  for  which  it  was 
originally  purchased. 

It  may  be  that  on  this  basis  a  logical  argument  could,  under  certain 
conditions,  be  advanced  for  setting  up  a  depreciation  reserve  fund  for 
the  item  land.  Take,  for  instance,  the  case  of  a  telephone  company 
having  a  central  office  so  located  as  to  be  in  the  approximate  center  of  its 
subscriber  development.  Assume  that  for  certain  reasons,  which  could 
not  possibly  be  foreseen  at  the  time  the  land  was  originally  purchased 
and  the  central  office  built,  the  telephone  development  in  the  area  fed 
by  this  particular  office  has  gradually  shifted,  without  appreciably  in- 
creasing, so  that  the  telephone  center  is  at  some  distance  from  the  original 
central  office  location.  Let  us  further  assume,  for  the  sake  of  argument, 
that  this  shift  in  population  has  been  accompanied  by  a  marked  decrease 
in  property  values  in  the  immediate  vicinity  of  the  telephone  exchange. 
In  such  a  case  not  only  would  the  land  have  actually  depreciated  in 
monetary  value,  but  it  would  have  become  " inadequate"  to  serve  the 
purpose  for  which  it  was  originally  purchased. 

If  cases  of  this  kind  were  frequently  encountered  there  might  be  some 
logic  in  arguing  that  land  is  depreciable.  However,  from  the  standpoint 
of  everyday  telephone  practice  land  is  not  depreciable,  although  its  mone- 
tary value  may  show  a  shrinkage  over  a  period  of  years.  On  the  other 
hand,  the  value  of  land  is  perhaps  even  more  likely  to  appreciate,  at  least 
in  prosperous  and  rapidly  growing  communities. 

300.  The  Appreciation  of  Land.  —  The  subject  of  land  appreciation, 
while  it  is  slightly  beyond  the  pale  of  the  present  discussion,  is  most 
interesting.    In  a  recent  paper  presented  before  the  Utilities  Bureau  in 
Philadelphia  Dr.  Milo  R.  Maltbie  advanced  several  arguments  which  are 
interesting,  to  say  the  least.    With  the  thought  that  Dr.  Maltbie's  paper 
reviews  the  question  of  appreciation  and  depreciation  from  a  slightly 
different  angle  than  that  of  most  of  the  utility  experts,  and  in  view  of  the 


174        TELEPHONE  RATES  AND  VALUES 

fact  that  Dr.  Maltbie's  long  association  with  the  New  York  Public  Service 
Commission  and  the  Interstate  Commerce  Commission  warrants  a  serious 
consideration  of  his  views,  the  paper  is  presented  in  its  entirety:  — 

"For  the  purposes  of  this  discussion  it  is  assumed  that  the  theory  that 
land  is  to  be  valued  according  to  the  present  value  of  contiguous  property 
is  sound.  It  means,  of  course,  that  as  the  land  increases  in  value,  or 
rather  as  adjacent  land  increases  in  value,  the  land  belonging  to  public 
utilities  increases  in  value,  —  that  it  is  to  be  distinguished  from  other 
property  which  decreases  in  value  from  year  to  year,  and  that  such  land 
has  an  annual  increment  or  an  average  annual  increment  in  value  from 
year  to  year. 

301.  Treatment  of  Income  Property.  —  "I  want  to  call  your  atten- 
tion to  one  other  major  premise.  The  argument  usually  runs  something 
like  this:  As  in  fixing  fair  value  one  takes  the  present  value  of  physical 
property  other  than  land,  so  one  must  take  the  present  value  of  land. 
Hence  as  physical  property  decreases  in  value  —  becomes  less  valuable 
as  time  passes  —  they  are  treated  equally.  As  Judge  Hough  says,  it  is 
treating  the  plus  and  minus  quantities  alike.  That  is  the  argument  for 
taking  land  at  its  appreciated  value  when  you  take  other  physical  property 
at  its  depreciated  value. 

"What  is  the  next  step  in  the  treatment  of  physical  property?  It  is 
said  that  inasmuch  as  physical  property  other  than  land  becomes  less 
valuable  as  time  passes,  and  must  ultimately  be  replaced  either  by  property 
of  the  same  kind  or  of  similar  kind,  there  must  be  an  allowance  made  in 
operating  expenses  or  added  to  operating  expenses  to  take  care  of  that 
depreciation  from  year  to  year.  I  will  use  a  simple  illustration  and  elimi- 
nate complications. 

"If  you  have  a  car  worth  $5,000,  which  is  to  last  twenty-five  years, 
it  decreases  in  value  from  year  to  year,  and  you  must  ultimately  replace 
it.  You  must  allow  about  $200  (that  is,  $5,000  divided  by  the  time)  in 
expenses  or  added  to  operating  expenses  each  year  in  order  to  replace 
the  car  at  the  end  of  the  time.  I  call  your  attention  to  the  fact  that  those 
who  believe  in  that  theory  do  not  say  that  you  must  necessarily  spend 
$200  a  year  as  you  go  along,  but  that  you  must  accumulate  a  fund  which 
will  provide  for  the  replacement  of  the  car  when  it  ultimately  ceases  to 
be  used. 

"The  money  is  not  actually  spent,  but  it  is  treated  as  an  operating 
expense;  it  goes  on  that  side  of  the  account  just  as  if  it  were  for  coal  or 
labor  and  actually  paid  out.  Such  is  the  treatment  of  depreciation  that 
is  supported  even  by  those  who  do  not  agree  that  in  determining  the 
fair  value  of  the  property  one  should  take  the  depreciated  value  of  the 
property. 

"Let  us  pass  from  that  kind  of  property  to  land.    Now  we  are  on  the 


DEPRECIATION  175 

other  side  of  the  ledger,  and  we  have  something  which  instead  of  decreasing 
in  value  increases  in  value  from  year  to  year.  That  annual  increment,  if 
it  is  to  be  treated  precisely  as  you  treat  depreciation  on  the  operating 
expense  side  of  the  question,  must  be  treated  as  an  income  or  put  on  the 
income  side  of  the  account. 

302.  Is  Appreciation  Real?  —  "What  are  some  of  the  objections 
to  this  theory?    In  the  first  place,  it  is  objected  that  the  annual  apprecia- 
tion is  not  an  income,  —  that  one  is  putting  down  a  supposititious  in- 
come, not  a  real  income.    Is  a  depreciation  allowance  that  is  accumulated 
against  some  future  day  an  actual  outlay?    Hence,  to  say  that  appreciation 
is  not  a  real  income  is  no  more  of  an  objection  than  to  say  that  deprecia- 
tion is  not  a  real  expense.    One  is  just  as  real  as  the  other. 

"But  let  us  see  whether  or  not  the  appreciation  of  property  is  not,  after 
all,  equal  to  a  real  income.  Suppose  you  have  land  costing  $100,000, 
and  your  rates  are  fixed  on  that  basis  at  the  time  you  buy  the  land.  In 
ten  years,  we  will  say,  it  has  increased  to  $200,000  in  value.  If  the  theory 
is  correct  that  the  public  must  allow  a  return  on  the  present  value  of  the 
land,  you  are  entitled,  after  ten  years,  to  charge  enough  to  secure  a  fair 
return  on  $200,000. 

"If  you  get  an  income  on  $200,000  when  you  have  an  investment  of 
only  $100,000,  what  do  you  want  better  than  income  of  that  sort?  I  do 
not  know  how  you  feel  about  it,  but  I  would  be  satisfied.  If  I  could  invest 
$100,000  in  a  piece  of  land,  have  an  income  on  that  $100,000  every  year, 
and  as  it  increased  in  value  from  year  to  year,  get  an  income  in  addition 
on  an  annual  increase  of  $10,000  (the  first  year  $100,000;  the  second, 
$110,000;  the  next  year,  $120,000;  and  so  on  up  to  $200,000),  I  would 
laugh  at  any  one  who  said  I  was  not  getting  an  equivalent  to  an  income  of 
$10,000  yearly  on  and  above  my  original  investment. 

"Suppose  you  went  to  New  York  and  talked  with  families  that  have 
owned  land  on  Manhattan  Island  almost  from  the  time  the  original  settlers 
got  it  from  the  Indians,  and  suppose  you  said  to  them:  'Neither  you 
nor  your  ancestors  ever  got  any  income  except  a  return  upon  the  original 
cost  upon  the  basis  of  $24  for  the  Island  of  Manhattan.'  They  would 
probably  tap  their  heads  and  say :  '  Nobody  at  home.'  And  they  probably 
would  add,  as  Al  Jolson  says:  'Not  only  is  there  nobody  at  home,  but 
nobody  has  ever  resided  there/ 

"Some  of  you  probably  have  to  make  out  an  income  tax  return.  Try 
that  theory  on  the  treasury  department  next  spring,  and  see  what  the 
treasury  department  will  say  about  it.  Say:  'Yes,  my  land  increased 
$10,000  in  value  this  year,  but  it  is  not  income,  it  is  a  fictitious  thing  to 
me.'  You  will  find  the  jail  into  which  you  go  is  not  fictitious. 

303.  Can  Appreciation  be  determined?  — "The  second  objection 
is  that  increase  in  land  values  is  not  definite;  it  is  uncertain,  it  is  intangible. 


176        TELEPHONE  RATES  AND  VALUES 

But  what  is  done  in  the  case  of  depreciation?  An  engineer  comes  along 
and  says  this  property  is  going  to  last  so  long,  and  so  much  should  be  set 
aside  for  depreciation.  Probably  that  is  the  best  that  can  be  done  at 
present,  but  it  is  less  certain  than  appreciation,  because  the  moment  one 
says  that  certain  land  is  to-day  worth  $200,000  and  cost  $100,000  ten 
years  ago,  or  its  value  was  $100,000  ten  years  ago,  you  know  what  the 
appreciation  was  during  that  period. 

"The  further  objection  that  I  have  heard  is:  'Well,  that  must  be  part 
of  the  single  tax  theory.' 

"  There  are  three  things  in  this  world  that  you  do  if  you  want  to  eliminate 
your  antagonist.  In  the  first  place,  you  may  say  he  is  a  socialist;  that 
just  about  disposes  of  him.  He  is  then  beyond  the  pale  of  all  reason,  no 
matter  what  he  is  saying.  If  you  cannot  do  that,  you  call  him  an  'im- 
practical man/  and  say:  'We  must  c'eal  with  things  practically.'  Of 
course,  that  is  a  knockout  blow.  But  if  he  still  survives,  call  him  a  single 
taxer,  and  say  it  with  bated  breath,  for  such  should  hardly  be  found  in 
decent  society. 

"But  it  is  not  a  question  of  whether  it  is  socialism  or  single  tax.  Is  it 
common  sense?  If  you  hold  to  the  theory,  which  I  believe  to  be  sound, 
that  depreciation  must  be  taken  account  of  in  operating  expenses  or  added 
to  operating  expenses,  you  must  admit  that  appreciation  in  land  values 
from  year  to  year  must  go  down  on  the  income  side  as  an  offset.  Take 
land  and  buildings!  Land  appreciates  and  buildings  depreciate. 

"If  you  do  not  believe  in  the  theory,  you  say  depreciation  on  the  build- 
ings must  be  put  into  operating  expenses,  but  you  will  not  allow  apprecia- 
tion on  the  land  to  be  put  on  the  income  side.  What  does  every  one  do? 
Every  one  figures  that  if  the  land  goes  up  in  value  as  much  as  the  buildings 
go  down  he  has  just  as  good  a  property  at  the  end  of  the  year  as  he  had 
at  the  beginning.  Why  is  it  not  logical  to  offset  in  public  utilities  apprecia- 
tion of  land  against  depreciation  of  the  buildings?  If  it  is  logical  as  applied 
to  land  and  buildings  it  is  logical  as  applied  to  other  property." 

304.  Factors  in  Determination  of  Life  of  Exchange  Buildings.  - 
The  life  of  a  telephone  building  is  very  difficult  to  determine.  It  depends 
upon  several  factors,  —  the  type  of  building,  the  quality  of  workmanship 
used  in  its  construction,  and  the  use  to  which  the  building  is  put.  Broadly 
speaking,  the  peculiar  type  of  buildings  used  in  telephone  work  have  an 
extremely  wide  range  of  life. 

As  in  the  case  of  most  of  the  other  plant  items  heretofore  discussed, 
functional  depreciation  plays  a  very  important  part  in  the  determination 
of  the  annual  rate  of  depreciation  for  telephone  buildings.  In  all  proba- 
bility the  life  of  the  latest  and  most  approved  type  of  concrete  building 
is  indeterminable  from  the  data  available  at  the  present  time.  It  may 
last  seventy-five  or  one  hundred  years,  or  more.  No  telephone  appraiser, 


DEPRECIATION  177 

however,  would  be  warranted  in  assuming  a  life  of  seventy-five  or  one 
hundred  years  for  even  the  latest  type  of  fireproof  construction;  functional 
depreciation  plays  too  important  a  part  in  the  problem. 

Rapid  development  in  the  community  served  by  a  telephone  building 
may  necessitate  radical  changes  and  enlargements,  so  that  the  general 
characteristics  of  a  building  may  be  so  changed  within  ten  or  fifteen  years 
that  the  architect  who  designed  the  building  would  not  recognize  it  himself. 

Then,  again,  there  is  always  the  possibility,  at  least  in  the  larger  towns 
and  cities,  that  a  telephone  building  may  have  to  be  abandoned  entirely 
to  make  way  for  some  new  scheme  of  distribution  necessitated  by  the 
community's  growth.  As  an  illustration,  a  telephone  building  constructed 
in  the  far  west  some  fifteen  or  twenty  years  ago  is  now  standing  idle  and 
rapidly  falling  into  decay.  A  change  in  local  requirements  necessitated 
the  abandonment  of  this  building  some  years  ago.  Inasmuch  as  it  is 
located  in  a  high-class  residential  district,  at  some  distance  from  the  rail- 
roads, it  is  entirely  unsuitable  for  manufacturing  purposes,  and  it  is  too 
far  removed  from  the  commercial  district  to  be  available  for  store  or  office 
use.  Therefore,  although  the  land  is  of  some  value,  the  building  itself 
has  become  a  liability  rather  than  an  asset  to  the  company,  for  the  com- 
pany is  obliged  to  pay  taxes  on  it  and  to  make  some  maintenance  expendi- 
tures. 

On  the  other  hand,  the  value  of  telephone  buildings  may,  in  rare  in- 
stances, increase.  For  instance,  a  few  years  ago  a  telephone  company  put 
up  a  rather  inexpensive  building  on  a  parcel  of  land  located  in  a  rapidly 
growing  residential  district.  While,  of  course,  the  building  itself  did  not 
increase  in  value,  the  land  increased  so  rapidly  that  a  few  years  later 
the  company  found  it  to  its  advantage  to  sell  the  property  at  a  price  far 
in  excess  of  the  original  cost. 

The  company  was  able  to  transfer  its  office  site  to  a  point  a  few  blocks 
distant,  and  thus  make  a  handsome  profit  on  its  original  real  estate  invest- 
ment. Of  course,  the  increment  in  value  in  this  case  was  primarily  due 
to  the  rise  in  land  values.  However,  it  happened  that  the  building  in 
question  was  so  constructed  that  the  purchasers  of  the  property  actually 
offered  a  higher  price  for  the  property  than  they  would  have  if  the  build- 
ing had  not  been  there.  The  building  was  subsequently  converted  into  a 
two-family  residence. 

305.  Life,  Salvage  Value  and  Yearly  Depreciation  of  Exchange 
Buildings.  —  Obviously,  the  problem  of  determining  the  life  of  telephone 
buildings  in  years,  the  salvage  values,  and  the  yearly  depreciation  rate 
proved  somewhat  perplexing  to  the  company  whose  depreciation  table 
is  under  discussion.  It  will  be  noted  that  no  figures  have  been  given  for 
States  A  and  B  for  the  items  "Flameproof  Buildings"  and  "Non-flame- 
proof Buildings,"  respectively.  However,  a  complete  set  of  figures  is 


178        TELEPHONE  RATES  AND  VALUES 

given  for  telephone  buildings  of  all  classes.  The  engineering  department 
has  determined  upon  a  life  of  twenty  years,  a  salvage  value  of  40  per  cent, 
and  an  annual  depreciation  rate  of  3  per  cent  as  being  reasonable  for  the 
property  as  a  whole. 

Undoubtedly  an  average  life  of  twenty  years  for  the  buildings  owned 
by  a  telephone  company  which  covers  a  rather  extensive  area  —  and 
probably  owns  buildings  of  all  types  —  is  entirely  within  reason.  The 
salvage  value  of  40  per  cent,  however,  seems  somewhat  high.  Ordinarily, 
even  with  the  prevalent  high  prices  for  second-hand  material,  a  salvage 
value  of  25  or  30  per  cent  is  plenty  high  enough. 

306.  Life  of  Telephone  Switchboards.  —  In  determining  the  average 
life  of  exchange  central  office  equipment  we  are  again  confronted  with 
the  factor  of  functional  depreciation.    A  prominent  telephone  engineer 
once  said  that  the  best  rule  he  knew  of  for  determining  the  life  of  telephone 
central  office  equipment  was  to  "take  your  longest  guess  and  add  ten 
years  to  it." 

This  engineer  undoubtedly  referred  to  the  life  of  central  office  equip- 
ment as  governed  by  physical  depreciation  alone.  For  instance,  the  way 
in  which  an  old-fashioned  magneto  telephone  board  will  hang  together 
and  give  service  long  after  it  has  theoretically  reached  the  end  of  its 
useful  life  is  astounding.  Any  one  who  has  the  good  fortune,  or  ill  fortune, 
of  operating  one  of  these  boards  over  a  long  period  will  agree  to  this 
statement. 

The  life  of  a  telephone  switchboard  as  based  on  physical  causes  is  a 
factor  of  minor  importance  in  the  determination  of  its  actual  life.  Un- 
doubtedly many  of  the  multiple  magneto  switchboards  installed  in  New 
York  City  would  still  be  in  service  if  their  period  of  usefulness  had  been 
determined  by  physical  depreciation  alone.  The  telephone  art  is  advancing 
so  rapidly,  and  the  individual  requirements  of  telephone  central  office 
districts  change  so  quickly,  that  physical  depreciation  plays  a  compara- 
tively small  part  in  the  problem  of  determining  the  average  useful  life 
of  a  modern  telephone  switchboard. 

It  would  be  most  interesting  to  consider  the  life  or  history  —  as  regards 
the  telephone  switchboard  problem  —  of  several  of  the  larger  telephone 
communities  during  the  past  fifteen  or  twenty  years.  In  many  cases  no 
sooner  had  a  new  board  been  installed  than  it  became  necessary  to  rip 
it  out  and  install  another  of  a  more  up-to-date  and  efficient  type. 

It  will  be  noted  that  the  average  life  for  the  three  States,  as  given  in 
Fig.  50,  is  9.1  years,  while  the  average  life  allowed  by  the  engineering 
department  is  ten  years.  This  figure,  however,  covers  more  than  the 
switchboard  —  it  covers  the  central  office  equipment  as  a  whole. 

307.  Central   Office   Equipment.  —  Central   office   equipment,    as 
we  know  it,  includes  the  switchboard,  the  terminal  frames,  the  protective 


DEPRECIATION  179 

equipment,  the  power  plant  and  the  central  office  cabling  and  wiring. 
Of  course,  many  of  these  items  have  a  considerably  shorter  life  than  the 
life  of  the  switchboard  proper,  and  this  fact  tends  to  materially  reduce 
the  average  life  of  central  office  equipment.  Taking  all  things  into  con- 
sideration, an  average  life  of  ten  years  for  item  "Exchange  Central  Office 
Equipment"  is  entirely  within  reason  for  a  comparatively  large  company 
having  in  its  plant  equipment  of  various  types  and  various  makes. 

In  this  connection  it  will  be  noted  that  although  the  heading  "Exchange 
Central  Office  Equipment"  has  been  used,  the  equipment  here  considered 
includes  both  exchange  and  toll  central  office  plant.  The  reason  for  this 
will  be  apparent  when  it  is  remembered  that  the  Interstate  Commerce 
Commission's  system  of  accounts  makes  no  provision  for  the  segregation 
of  exchange  and  toll  central  office  equipment.  The  company  whose 
table  is  under  consideration  has  followed  the  practice  adopted  by  all 
telephone  companies,  of  including  toll  boards  and  toll  equipment  as  a  .part 
of  the  exchange  central  office  plant. 

An  average  salvage  value  of  20  per  cent  of  the  first  cost,  or  reproduction 
cost,  has  been  assigned  by  the  engineering  department  to  the  item  "Central 
Office  Equipment,"  Fig.  50.  All  things  considered,  this  allowance  is 
probably  entirely  within  reason. 

There  may  be,  of  course,  some  cases  where,  with  the  prevalent  high 
prices  of  copper  and  platinum,  it  may  be  possible  to  realize  more  than  20 
per  cent  on  an  individual  installation.  However,  in  other  cases  it  is 
doubtful  if  anywhere  near  this  amount  could  be  obtained.  Therefore,  for 
a  large  company  having  a  rather  varied  assortment  of  central  office 
equipment,  a  salvage  value  of  20  per  cent  of  the  reproduction  cost  is 
undoubtedly  fair. 

308.  Subscriber's    Station    Apparatus.  —  Functional   depreciation 
has,  in  the  past,  played  a  very  important  part  in  the  determination  of  the 
life  of  subscriber  station  apparatus.    The  development  stage,  however, 
of  the  art  of  making  telephone  instruments  is  largely  over. 

During  the  past  few  years  wall  and  desk  sets  of  both  common  battery 
and  magneto  type  have  become  so  standardized  that  obsolescence  de- 
preciation is  becoming  less  and  less  a  factor  in  the  problem  of  determining 
the  life  of  subscriber's  equipment.  Of  course  this  statement  applies  only 
to  plants  equipped  with  modern  apparatus  and  to  plants  not  susceptible 
to  a  future  change  from  the  magneto  to  the  common  battery  type  of 
equipment. 

Referring  again  to  Fig.  50,  it  will  be  noted  that  the  average  life  of 
station  apparatus  is  given  at  eight  years  and  the  salvage  value  at  10 
per  cent.  These  figures  are  undoubtedly  conservative  for  a  large  property 
containing  an  appreciable  percentage  of  obsolescent  equipment. 

309.  Subscriber's   Station   Installation.  —  It  will  be  remembered 


180  TELEPHONE  RATES  AND  VALUES 

that  under  this  caption  there  is  included  not  only  the  wiring  between  the 
point  of  entrance  to  the  subscriber's  premises  and  the  instrument,  but 
also  all  of  the  labor  and  miscellaneous  material  involved  in  placing  a 
telephone.  Strange  as  it  may  seem,  functional  depreciation  also  plays  a 
part  in  the  determination  of  the  average  life  of  equipment  falling  under 
the  classification,  "Subscribers'  Installations." 

The  reason  for  this  will  be  apparent  when  it  is  remembered  that  interior 
wiring  frequently  has  to  be  abandoned  to  facilitate  the  removal  of  a  tele- 
phone instrument  from  one  part  of  the  premises  to  another.  One  sub- 
scriber may  want  the  telephone  in  the  hallway,  and  his  successor,  probably 
the  next  tenant  on  the  premises,  may  want  it  in  the  living  room.  In 
many  cases  such  a  change  will  necessitate  entire  rewiring  from  the  entrance. 

The  functional  depreciation  in  this  case  is  that  resulting  from  inadequacy 
rather  than  obsolescence,  as  in  the  subscriber's  apparatus. 

The  average  life  of  subscribers'  installations,  as  given  in  Fig.  50,  is 
seven  years,  one  year  shorter  than  the  average  life  of  subscriber's  apparatus. 
Of  course  this  item,  as  all  of  the  others  we  have  so  far  considered,  is  neces- 
sarily dependent  upon  the  exigencies  of  the  case  in  question.  For  some 
of  the  larger  telephone  companies  operating  in  the  cities  it  may  be  found 
that  the  average  life  is  less  than  seven  years.  On  the  other  hand,  in 
rural  communities,  where  the  population  is  less  inclined  to  shift,  the  average 
life  may  be  determined  largely  by  physical  depreciation,  and,  in  such  an 
event,  it  would  probably  be  considerably  more  than  seven  years. 

The  salvage  value  as  given  in  the  table  is  zero.  When  wiring  has  lived 
its  useful  life  it  is,  of  course,  abandoned,  and  no  negative  salvage  value  is 
involved.  It  will  be  remembered  that  a  negative  salvage  value  represents 
the  cost  of  removal,  as  illustrated  in  the  case  of  the  exchange  iron  wire 
previously  referred  to. 

310.  The  Toll  Plant.  —  At  the  bottom  of  Fig.  50  will  be  found  statistics 
for  the  toll  plant.  It  is  hardly  necessary  to  discuss  the  various  items  in 
detail;  suffice  it  to  say  that  the  same  general  rules  apply  to  the  preparation 
of  an  annual  depreciation  table  for  toll  as  obtained  for  exchange  plant. 

In  the  table  it  will  be  noted  that  most  of  the  toll  items  have  been 
assigned  longer  lives  than  the  corresponding  items  in  the  exchange  portion 
of  the  table.  The  reason  for  this  is  obvious.  Take,  for  instance,  the  case 
of  the  toll  poles  which  have  been  given  an  average  life  of  sixteen  years, 
while  exchange  poles  have  been  allowed  a  life  of  only  twelve  years. 

Naturally,  toll  poles  are  less  susceptible  to  depreciation  from  functional 
causes;  the  life  of  a  well-built,  properly  located  toll  pole  line  will  be  limited 
only  by  the  physical  life  of  the  poles  themselves.  In  other  words,  once 
placed,  a  toll  pole  can  usually  live  out  its  life  undisturbed  by  the  changes 
and  removals  necessitated  by  variations  in  curb  lines,  municipal  ordi- 
nances, etc.  These  latter  factors,  it  will  be  remembered,  have  a  very  real 
bearing  on  the  life  of  exchange  poles. 


DEPRECIATION  181 

In  a  similar  manner,  with  a  little  thought,  the  reader  undoubtedly  can 
explain  for  himself  the  other  differences  between  the  figures  assigned  to 
the  toll  plant  and  those  assigned  to  the  exchange  plant. 

311.  Determination  of  Annual  Depreciation  Rate  of  the  Com- 
ponent Elements.  —  At  the  risk  of  trying  the  reader's  patience,  Fig. 
50  has  been  discussed  in  considerable  detail.    However,  this  subject  of 
the  determination  of  the  annual  rate  of  depreciation  of  the  component 
elements  of  a  telephone  property  is  a  most  important  one,  and  the  data 
given  in  the  table  represent  the  most  complete  analysis  of  this  problem 
that  has  come  to  the  writer's  attention.    The  company  whose  property 
is  tabulated  in  the  table  is  a  large  one,  operating  over  an  extensive  territory, 
and  the  men  who  compiled  the  table  have  had  long  and  varied  experience 
in  telephone  work. 

So  many  factors  enter  into  the  compilation  of  a  table  of  this  kind,  which 
are  not  apparent  to  the  reader  unless  he  has  had  prior  experience  in 
depreciation  problems,  that  it  was  deemed  advisable  to  cover  the  subject 
rather  thoroughly,  pointing  out  the  way  functional  depreciation  tends  to 
shorten  the  life  of  many  of  the  component  elements  of  a  telephone  property. 
While,  as  heretofore  suggested,  the  determination  of  the  annual  rate  of 
depreciation  should  always  be  governed  by  the  individual  requirements  of 
the  case  under  consideration,  nevertheless,  it  is  thought  that  Fig.  50,  with 
the  accompanying  discussion,  may  perhaps  serve  as  a  guide  for  the  reader 
in  solving  his  own  depreciation  problems. 

312.  Composite    Depreciation    Rate.  —  The  determination  of  the 
composite  depreciation  rate  which  may  be  applied  to  a  telephore  property, 
as  a  whole,  may  at  first  seem  a  somewhat  complicated  problem.    It  is 
only  necessary,  however,  to  analyze  each  item  of  plant  by  the  methods 
outlined  in  the  foregoing  discussion.     Fig.  51,  entitled  "  Determination 
of  Composite  Depreciation  Rate,"  presents  a  complete  analysis  of  the 
determination  of  the  annual  amount,  in  dollars,  to  be  set  aside  each  year, 
and  of  the  corresponding  percentage,  in  terms  of  reproduction  cost,  for 
a  small  property  serving  about  2,500  subscribers  which  is  located  in  the 
Middle  West. 

313.  Determination  of  the  Composite  Depreciation  Rate.  —  The 
various  items  of  plant  are  listed  in  column  1,  and  their  respective  repro- 
duction costs  in  column  2.    Column  3  gives  the  salvage  value  expressed 
in  percentage  of  the  reproduction  cost,  and  column  4  the  corresponding 
wearing  values.     These  wearing  values  are,  of  course,  determined  by 
deducting  the  salvage  value  in  dollars  corresponding  to  the  percentage 
given  in  column  3  from  the  reproduction  cost  as  given  in  column  2. 
It  will  be  noted  that  many  of  the  items,  such  as  right  of  way  and  pole 
lines,  have  been  assigned  no  salvage  value,  and  that  the  wearing  value  in 
these  cases  is  equal  to  a  reproduction  cost. 


182 


TELEPHONE  RATES  AND  VALUES 


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Buildings,  .... 
Right  of  way  
Pole  lines,  —  city,  rural  and  toll, 
Line  wire,  —  city,  rural  and  toll, 
Drop  wire,  —  city  and  rural,  . 
Aerial  cable  and  messenger,  . 
Aerial  cable  terminals  and  fittings, 
Main  conduit,  manholes  and  pavin 
Subsidiary  conduit, 
Underground  cable,  main, 
Underground  cable,  subsidiary  and 
Underground  cable  terminals  and  1 
Subscribers'  station  apparatus, 
Subscribers'  station  installations, 
Central  office  equipment, 
General  equipment, 

Total  
Incidentals,  omissions  and  continge 
Warehouse  and  purchasing  expense 
Tools  and  tool  expense,  . 

Total  
General  and  legal  expense, 
Engineering  and  general  supervisio 
Insurance  and  taxes  during  constru 
Interest  during  construction,  . 

Total  collateral  construction  cost 
Land,  
Material  and  supplies, 

Total  
Grand  total, 

DEPRECIATION  183 

Column  5  shows  the  estimated  life  in  years,  and  column  6  the  annual 
depreciation  expressed  in  percentage  of  wearing  value.  The  yearly 
depreciation  rates  as  given  in  column  6  are,  of  course,  the  reciprocals  of 
the  corresponding  lives  given  in  column  5.  Thus  the  life  of  the  right  of 
way  is  given  at  twenty-five  years  and  its  depreciation  rate  at  4  per  cent. 

The  annual  depreciation  expressed  in  dollars,  as  given  in  column  7, 
is  obtained  by  multiplying  the  wearing  values  by  their  respective  rates 
of  annual  depreciation.  To  illustrate:  the  right  of  way  depreciates  at  the 
rate  of  $89  a  year,  —  4  per  cent  of  $2,229. 

In  this  way  the  total  annual  depreciation  in  dollars  is  determined  for 
the  inventoriable  portion  of  the  property,  and  this  amount  ($14,166) 
divided  by  the  corresponding  reproduction  cost  ($178,138)  gives  a  compos- 
ite rate  of  depreciation,  expressed  in  percentage  of  reproduction  cost, 
of  7.9  per  cent. 

By  applying  this  percentage  to  the  total  ($13,365)  of  the  items,  inci- 
dentals, omissions,  purchasing,  tool  expense,  etc.,  the  corresponding 
depreciation  in  dollars  per  annum  is  obtained  ($1,063).  In  a  similar 
manner  the  total  reproduction  cost  of  the  collateral  items  ($34,360),  when 
multiplied  by  7.9  per  cent,  gives  an  annual  depreciation  of  $2,732. 

The  sum  of  these  items  —  annual  depreciation  of  inventoriable  property, 
of  the  items,  incidentals,  etc.,  and  of  the  collateral  costs  —  gives  the  total 
depreciation  on  the  property  as  a  whole  expressed  in  dollars  per  annum. 
In  the  case  under  consideration  this  annual  depreciation  amounts  to 
$17,961.  Seventeen  thousand  nine  hundred  and  sixty-one  dollars,  then, 
represents  the  amount  which  should  be  deducted  from  the  gross  earnings 
of  this  company  and  set  aside  to  replace  the  depreciation  which  has  taken 
place  in  the  property  during  the  fiscal  year  immediately  preceding  the 
date  at  which  the  table  was  compiled. 

314.  Composite  Depreciation  Rate  Percentage.  —  It  will  be  readily 
seen  that  the  compilation  of  such  a  table  each  year  as  a  basis  of  deter- 
mining the  proper  amount  to  be  deducted  from  gross  earnings  to  provide 
for  depreciation  would  prove  a  somewhat  tedious  task.    In  small  proper- 
ties, where  the  total  value  of  the  physical  property  does  not  vary  ap- 
preciably from  year  to  year,  it  may  be  desirable  to  determine  a  composite 
depreciation  rate  percentage  which  may  be  applied  directly  to  the  repro- 
duction cost.    Such  a  composite  rate  is  shown  in  the  lower  right-hand 
corner  of  Fig.  51. 

It  was  derived  by  adding  the  reproduction  cost  of  the  non-depreciable 
items  —  land,  and  material  and  supplies  —  to  the  reproduction  cost  of 
the  depreciable  property,  and  taking  the  ratio  of  the  total  depreciation 
($17,961)  to  the  total  thus  obtained  ($234,863),  giving  a  composite  rate 
of  depreciation  of  7.6  per  cent. 

315.  Method  of  determining  Amount  for  Depreciation  Reserve 
and  its  Disadvantages.  —  Assuming  that  at  the  end  of  the  next  year 


184        TELEPHONE  RATES  AND  VALUES 

the  company  wished  to  determine  a  fair  amount  to  be  credited  to  depre- 
ciation reserve  without  going  through  these  rather  complicated  compu- 
tations, and  that  the  reproduction  cost  of  the  property  as  a  whole  at  the 
end  of  the  next  year  had  increased  to,  say,  $275,000,  the  amount  to  be 
set  aside  in  depreciation  reserve  would  be  $275,000  times  7.6  per  cent,  or 
$20,900. 

Obviously,  this  latter  method  affords  an  easy  means  of  determining 
the  amount  which  should  be  deducted  from  gross  earnings  to  provide  for 
depreciation.  However,  it  should  be  clearly  understood  that  this  method 
may  be  applied  only  where  the  net  increase  in  value  is  small,  and  where 
this  increase  is  distributed  proportionally  over  the  various  items  of  plant. 

It  will  be  readily  seen  that  if  this  net  increase  is  not  distributed  pro- 
portionally, the  annual  rate  of  depreciation  will  be  appreciably  affected. 
For  instance,  if  the  $40,137  increase  — the  difference  between  $275,000 
and  $234,863  —  had  been  due  to  an  increase  in  only  one  item  of  plant, 
such  as  "Buildings,"  it  will  be  readily  seen  that  the  corresponding  compos- 
ite depreciation  rate  for  the  depreciable  property,  in  this  case  7.9  per 
cent,  will  be  materially  affected,  and  that  this,  in  turn,  will  cause  a  marked 
change  in  the  total  composite  depreciation  rate,  —  7.6  per  cent. 

If,  however,  this  $40,137  increase  in  the  reproduction  cost  of  the  plant 
had  been  distributed  proportionally  over  the  various  items  of  inventoriable 
property,  the  net  change  in  the  composite  rate,  7.6  per  cent,  would  not 
be  appreciable.  To  make  this  a  little  clearer,  suppose  that  21/235  (the 
approximate  ratio  of  the  reproduction  cost  of  buildings  as  shown  in  the 
table  to  the  total  reproduction  cost)  of  the  $40,137  increase  had  been 
chargeable  to  the  building  account  and  the  balance  distributed  in  a  like 
manner  over  other  accounts,  it  will  be  readily  seen  that  the  composite 
depreciation  rate,  7.6  per  cent,  will  not  be  materially  affected. 

316.  Depreciation  Reserve  Fund.  —  The  reader  may  have   gained 
the  impression  from  the  foregoing  discussion  of  depreciation  and  of  reserve 
funds  that  the  amount  which  is  deducted  annually  from  gross  earnings  to 
provide  a  means  for  making  good  the  ravages  of  depreciation  is  actually 
set  aside  in  a  fund,  and  that  this  fund  is  placed  in  a  bank  or  invested  in 
outside  securities.    This  is  not  the  case,  however.    Most  companies  re- 
invest their  depreciation  reserves  in  their  own  properties.    The  reason  for 
this  will  be  obvious. 

Assuming  that  the  business  is  well  managed,  the  most  profitable  way 
to  take  care  of  reserve  funds  is  to  reinvest  them  in  the  property,  and  this 
practice  is  followed  by  most  telephone  properties. 

317.  Conclusion.  —  In  a  very  general  way  the  subject  of  depreciation 
and  depreciation  reserves  has  been  covered.    The  reader  will  realize  that 
a  comprehensive  treatment  of  this  matter  would  require  more  space 
than  can  possibly  be  assigned  to  this  phase  of  the  subject  in  a  general 


DEPRECIATION  185 

discussion  of  telephone  appraisals.  The  purpose  of  this  chapter,  however, 
has  been  merely  to  outline  the  general  principles  of  depreciation,  and  to 
cover,  in  rather  a  broad  way,  the  application  of  these  principles  to  the 
problems  of  the  telephone  manager. 

If  the  reader  wishes  to  carry  his  study  further  he  will  find  excellent 
discussions  of  this  phase  of  the  subject  in  the  proceedings  of  the  American 
Institute  of  Electrical  Engineers,  of  the  American  Society  of  Civil 
Engineers,  and  in  the  annual  reports  of  the  Wisconsin,  Illinois,  New  York, 
Massachusetts  and  other  prominent  State  utility  commissions. 

318.  Two  Different  Standpoints  for  considering  Depreciation.  — 
In  closing,  it  may  be  well  to  again  direct  attention  to  the  fact  that  depre- 
ciation should  be  viewed  from  two  different  standpoints,  —  that  of  the 
accountant  and  that  of  the  engineer. 

The  function  of  the  engineer  is  to  determine  physical  depreciation, 
basing  his  determination  on  st'udies  of  the  average  life  and  the  salvage 
value  of  the  various  component  elements  of  the  telephone  plant,  and  upon 
a  careful  consideration  of  the  peculiar  requirements  of  each  individual 
property. 

The  function  of  the  accountant,  on  the  other  hand,  is  to  devise  intelli- 
gent methods  of  recording  the  facts  as  determined  by  the  engineer;  to 
devise  an  adequate  method  of  determining  an  annual  rate  of  depreciation 
for  the  property  as  a  whole;  and  to  care  for  the  provision  of  an  adequate 
reserve  fund. 

The  same  man,  of  course,  may  undertake  the  solution  of  both  of  these 
problems,  for  the  accounting  problem  is  becoming  more  and  more  of  a 
factor  in  telephone  engineering  work.  However,  in  so  doing  the  appraisal 
engineer  should  bear  these  distinctions  in  mind,  and  be  governed  accord- 
ingly. At  any  rate,  these  two  phases  of  the  problem  should  be  correlated 
and  their  respective  solutions  predicated  upon  a  thorough  understanding 
of  the  character  and  the  individual  peculiarities  of  the  depreciation  factors 
involved  in  the  plant  under  consideration. 


CHAPTER  XX 
THE  FUNCTION  OF  THE  APPRAISAL  IN  RATE-MAKING 

319.  Underlying  Theory  of  Telephone  Rate -Making.  —  In  one 

of  the  opening  chapters  of  this  series  the  various  uses  of  the  telephone 
appraisal  were  discussed  in  some  detail.  Of  these  uses  the  function  of  the 
appraisal  in  building  up  reserve  funds  and  the  function  of  the  appraisal 
in  rate-making  probably  are  the  most  important.  The  function  of  the 
appraisal  in  building  up  the  depreciation  reserve  was  discussed  in  the 
previous  chapter.  In  the  present  chapter  the  function  of  the  appraisal 
in  telephone  rate-making  will  be  considered. 

Any  one  who  has  glanced  over  the  record  of  a  rate  case  without  previous 
acquaintance  with  the  subject  may  conceive  the  idea  that  the  matter  of 
telephone  rate-making  is  very  complicated.  The  records  of  rate  cases 
are  apt  to  be  voluminous  and  are  likely  to  convey  an  impression  of  com- 
plexity. The  underlying  theory,  however,  when  shorn  of  all  of  the  frills 
which  must  necessarily  be  added  in  the  course  of  adjudication  before 
regulatory  bodies,  is  exceedingly  simple. 

It  is  only  necessary  to  ascertain  the  value  of  the  property  to  determine 
upon  a  fair  rate  of  return  on  this  valuation,  and  to  provide  rates  adequate 
to  produce  this  return.  There  are,  of  course,  other  factors  that  enter 
into  rate  problems,  but  these  are  merely  steps  in  the  solution  of  the 
problem. 

320.  Early  History  of  Rate   Regulation.  —  Before  taking  up   a 
detailed  consideration  of  the  problem  of  rate  adjustment  it  may  be  inter- 
esting to  review  briefly  the  history  of  rate  regulation  and  the  part  that 
it  has  played  in  the  development  of  the  subject  of  public  utility  appraisals. 

Long  before  the  public  utilities,  as  we  know  them,  came  into  existence 
periodical  attempts  were  made  to  regulate  certain  public  enterprises. 
As  suggested  in  the  opening  chapter,  boat  traffic  on  the  River  Thames  was 
subject  to  a  form  of  commission  regulation  early  in  the  eighteenth  century. 
A  little  later  some  of  the  stage  coach  or  bus  lines  operating  in  and  about 
the  city  of  London  were  subject  to  certain  rules  and  regulations  laid  down 
by  the  county  authorities.  These  early  attempts,  however,  were  never 
very  vigorous,  and  were  soon  given  up  entirely. 

In  the  latter  part  of  the  nineteenth  century,  with  the  advent  of  the 
modern  public  utilities,  the  State  of  Massachusetts  took  up  the  problem 
of  rate  regulation  in  earnest,  and  the  first  real  public  utility  commission 
was  formed.  During  the  first  few  years  of  the  Massachusetts  commis- 


FUNCTION  OF  THE  APPRAISAL  IN  RATE-MAKING    187 

sion's  existence  there  was  a  reasonable  doubt  in  the  public  mind  as  to 
whether  the  large  expenditures  involved  in  the  establishment  and  main- 
tenance of  such  a  commission  were  justified.  As  time  passed,  and  the 
public  realized  the  good  work  that  was  being  done  in  the  way  of  regulating 
rates  and  improving  the  quality  of  the  service  of  the  various  utility  cor- 
porations in  Massachusetts,  the  scope  of  the  commission's  work  was  en- 
larged and  its  future  assured. 

In  the  meantime,  people  in  other  States  had  been  watching  the  experi- 
ment, and  early  in  the  twentieth  century  three  new  commissions  were 
formed,  two  of  them  in  the  State  of  New  York  and  one  in  Wisconsin. 
All  of  these  early  commissions  gave  special  attention  to  the  problem  of  rate 
regulation,  and,  as  an  aid  to  their  investigation  of  rate  problems,  did 
everything  in  their  power  to  develop  the  science  of  utility  appraisement. 

321.  Development  of  Appraisal  Methods.  —At  first,  appraisals  were 
made  entirely  by  what  may  be  termed  "book  value  method."     Estimates 
of  value  were  made  by  accountants,  based  largely  upon  the  record  of 
property  values  as  shown  in  the  company's  books.     In  some  instances 
capitalization  was  the  sole  basis  of  determining  property  values.     If  a 
company  was  capitalized  at  $500,000,  this  figure  was  assumed  to  be  the 
proper  base  for  determining  rates.    In  other  cases  a  conscientious  effort 
was  made  to  determine  the  actual  investment  in  the  property  as  shown  by 
the  books.    It  was  soon  found,  however,  that  the  book  value  method  gave 
most  unsatisfactory  results,  and  that  records  of  original  investment  were 
often  difficult  to  determine. 

Next  came  the  original  cost  method.  Regulatory  bodies  and  appraisal 
experts,  having  agreed  that  the  book  value  method  was  a  failure,  cast 
about  for  a  more  satisfactory  means  of  determining  utility  property  values. 
The  original  cost  method,  as  we  have  seen,  consists  of  a  careful  determina- 
tion of  the  actual  original  cost  of  a  property.  Records  of  original  cost 
are  often  difficult  to  determine,  and  even  when  they  can  be  determined 
they  do  not  necessarily  present  a  fair  index  of  property  values.  Appraisal 
experts  and  commissioners  soon  found  this  to  be  the  case,  and  again  cast 
about  for  a  satisfactory  method  of  valuation. 

Finally  the  reproduction  cost  theory  was  developed,  and  reproduction 
cost  is  now  universally  conceded  to  be  one  of  the  most  important  factors 
in  the  determination  of  fair  utility,  values  for  rate-making  purposes. 
Some  of  the  leading  legal  authorities  have  ruled  that  original  cost,  de- 
preciated value  and  capitalization  should  also  be  taken  into  account  in 
determining  the  fair  value  of  utility  property;  but  they  all  concede  that 
the  reproduction  cost,  if  not  the  most  important,  is  at  least  one  of  the 
most  important,  factors. 

322.  Distinction  in  Figures  used  for  Value.  —  In  this  connection 
it  is  interesting  to  note  that  one  of  the  large  western  utility  companies 


188        TELEPHONE  RATES  AND  VALUES 

has,  in  its  recent  rate  cases,  made  a  distinction  between  "value"  and 
"  value  for  rate-making  purposes."  In  other  words,  in  submitting  an 
appraised  value  of  its  properties  to  be  used  as  a  basis  for  rate  adjustments 
it  reserves  the  privilege  of  claiming  a  much  higher  figure  as  the  true 
value  of  the  property. 

In  the  matter  of  franchises,  for  instance,  this  company  claims  that  its 
franchise  privileges  have  a  far  greater  value  than  the  actual  cost  of  securing 
the  franchises,  and  it  will  be  remembered  that  franchise  cost  is  the  only 
franchise  value  allowed  by  public  utility  commissions.  The  stand  of  this 
company  is  most  interesting,  and  it  may  have  considerable  bearing  upon 
future  appraisal  work. 

323.  Factors  involved  in  Solution  of  Any  Rate  Problem.  —  There 
are  five  factors  to  be  taken  into  consideration  in  the  solution  of  any  rate 
problem.    These  factors  may  be  briefly  summarized  as  follows:  — 

1.  The  value  of  the  property  as  determined  by  the  appraisement. 

2.  Operating  expenses. 

3.  Annual  depreciation. 

4.  Revenue. 

5.  Rate  of  return  which  may  be  allowed  on  the  valuation. 

324.  Operating  Expenses  and  Net  Revenue.  —  The  correlation  of 
the  five  factors  mentioned  in  the  preceding  section  may  perhaps  be  better 
understood  with  the  aid  of  a  simple  illustration.    Assume  the  case  of  a 
telephone  company  that  has  but  one  source  of  revenue  —  from  single 
party  service  at  $2  a  month,  or  $24  a  year.    If  there  are  1,000  subscribers 
the  gross  annual  revenue  of  the  company  will  amount  to  $24,000  a  year. 

To  simplify  the  illustration  we  will  assume  that  there  is  no  funded 
indebtedness,  and  that  the  operating  expenses  consist  merely  of  the  actual 
cost  of  running  the  plant.  Such  operating  expenses  would  include  the 
salaries  of  employees,  rentals,  minor  expenditures  involved  in  the  main- 
tenance of  the  plant,  and,  in  this  case,  taxes  and  insurance.  It  will  also 
be  assumed  that  the  operating  expenses  are  $14,000  a  year.  This  will 
give  an  operating  revenue  of  $24,000  less  $14,000,  or  $10,000  a  year. 

We  may  further  assume  that  an  appraisal  has  been  made  of  the  plant, 
and  that  the  reproduction  cost  of  the  physical  property,  including  the 
collateral  costs,  is  found  to  be  $75,000.  As  pointed  out  in  the  last  chapter, 
an  allowance  must  be  made  for  depreciation.  If  we  assume  the  annual 
depreciation  rate  to  be  approximately  the  same  as  that  determined  in 
the  illustration  of  the  preceding  chapter,  the  annual  amount  to  be  deducted 
from  revenue  to  provide  for  the  annual  depreciation  will  be  approximately 
1\  per  cent  of  $75,000,  —  the  reproduction  cost  of  the  physical  property, 
—  or  $5,625.  This  will  serve  as  a  further  deduction  from  the  operating 
revenue,  and  the  net  revenue  will  be  $4,375. 


FUNCTION  OF  THE  APPRAISAL  IN  RATE-MAKING    189 

Courts  and  commissions  have  almost  universally  agreed  that  any 
operating  telephone  company  is  entitled  to  earn  a  return  not  only  on  its 
investment  in  physical  property  but  also  on  the  business  value.  If  we 
assume  the  business  value  in  the  case  under  consideration  to  be  $25,000 
(this  $25,000  would  include  the  cost  of  franchises,  cost  of  financing  and  the 
cost  of  establishing  the  business)  we  will  have  a  total  reproduction  cost 
of  the  physical  property,  and  the  attached  business,  of  $100,000. 

325.  Return  on  Investment.  —  Right  here  the  question  may  arise 
in  the  reader's  mind  as  to  why  reproduction  cost  is  used  as  a  basis  for 
determining  a  fair  return  instead  of  present,  or  depreciated,  value.    Ob- 
viously, any  business  concern  is  entitled  to  earn  a  fair  return  on  its  invest- 
ment, and  the  investment  in  the  case  under  consideration  is  gauged  by  the 
reproduction  cost  of  the  property  and  its  attached  business.    The  fact 
that  the  property  is  constantly  depreciating  in  value,  and  that  its  real 
value  is  always  less  than  the  reproduction  cost,  is  recognized  in  that  we 
are  making  a  deduction  from  the  earnings  to  set  up  a  depreciation  reserve 
fund. 

If  the  net  earnings  amount  to  $4,375,  and  the  reproduction  cost  of  the 
physical  property  and  the  attached  business  amounts  to  $100,000,  ap- 
parently the  company  is  earning  only  4.375  per  cent  on  its  investment. 
Obviously,  the  patient  is  sick;  it  only  remains  to  carefully  diagnose  the 
case  and  find  out  just  where  the  trouble  lies. 

Any  one  at  all  familiar  with  modern  business  will  realize  that  the  stock- 
holders of  any  company  are  entitled  to  at  least  6  per  cent  on  their  invest- 
ment. People  who  have  money  to  lend  can  invest  in  first  mortgages,  and 
sometimes  in  bonds,  and  be  assured  of  a  return  of  from  5  to  6  per  cent  on 
then'  investment.  Obviously,  a  stock  investment  in  any  business  enter- 
prise is  more  hazardous  than  a  bond  or  mortgage  investment,  and  therefore 
the  investors  should  be  assured  of  at  least  as  large  a  return  as  they  can 
obtain  from  safer  investments. 

326.  Considerations  affecting  Net  Earnings.  —  If  we  assume  8  per 
cent  to  be  a  fair  return  on  the  stock  of  a  public  utility  company,  the  com- 
pany cited  in  our  illustration  should  have  an  annual  net  earning  of  at  least 
$8,000.    What,  then,  is  the  trouble?  Those  who  are  not  already  versed  in 
rate-making  problems  will  at  once  answer,  "The  rates  are  too  low." 
However,  this  is  not  necessarily  the  case. 

It  may  be  that  the  capitalization  is  too  high;  that  the  reproduction 
cost,  as  represented  by  the  appraised  value  of  the  property  and  business, 
is  less  than  $100,000.  If  such  were  the  case  it  will  be  obvious  that  the 
net  earnings  would  be  affected  in  two  ways :  in  the  first  place,  the  amount 
to  be  set  aside  in  depreciation  reserve  would  be  excessive,  and  in  the  second 
place,  a  reduction  in  the  capitalization  would  necessarily  result  in  a  higher 


190        TELEPHONE  RATES  AND  VALUES 

return  on  the  investment.  For  instance,  if  the  value  of  the  property  were 
$50,000  instead  of  $100,000,  the  $4,375  net  earning  would  show  a  return 
of  over  8  per  cent  instead  of  slightly  over  4  per  cent. 

Again,  it  may  be  that  the  operating  expenses  —  in  this  case,  $14,000  — 
are  excessive.  If  a  careful  analysis  of  these  two  factors  does  not  disclose 
the  trouble  it  may  be  well  to  investigate  the  annual  rate  of  depreciation. 
From  the  foregoing  chapter  the  reader  will  readily  realize  that  false 
assumptions  as  to  the  life  or  the  salvage  values  of  any  of  the  component 
elements  of  a  telephone  property  may  result  in  an  annual  rate  of  deprecia- 
tion which  is  too  high  or  too  low,  as  the  case  may  be. 

Without  going  into  details  it  seems  probable  that  the  reproduction  cost 
assumed  in  the  illustration  is  a  little  high.  There  are  only  1,000  subscribers, 
and  a  valuation  of  $75,000  for  the  physical  property  and  $100,000  for 
the  total  property  and  business  would  mean  a  reproduction  cost  of  $75 
and  $100,  respectively,  per  station.  Probably  such  a  plant,  adequate  to 
serve  1,000  subscribers,  would  not  average  $50  per  station  for  the  physical 
property,  and,  say,  $60  to  $70  per  station  for  the  total  reproduction  cost, 
including  the  business.  All  of  the  foregoing  items  should  be  carefully 
considered  before  jumping  at  the  conclusion  that  the  rates  are  too  low. 

Before  taking  up  the  more  complicated  problem  of  rate-making  the  five 
factors  already  mentioned  will  be  considered  a  little  more  in  detail. 

327.  Valuation.  —  It  is  hardly  necessary  to  dwell  at  length  on  the 
question  of  valuation.  This  phase  of  the  subject  has  been  discussed  in 
considerable  detail  in  the  other  chapters.  It  is  sufficient  to  say  that  any 
rate  investigation  must  be  predicated  upon  a  careful  determination  of 
the  reproduction  cost  of  both  the  physical  property  and  the  so-called 
intangible  assets  of  a  company. 

Such  a  reproduction  cost  can  only  be  obtained  by  first  making  a  careful 
inventory  of  the  physical  property  and  then  appraising  this  inventory 
with  the  aid  of  such  unit  costs  as  may  be  deemed  fair  at  the  date  of  the 
appraisal,  and  finally  by  adding  an  adequate  allowance  for  the  collateral 
costs  and  intangible  values. 

In  considering  the  question  of  valuation  every  effort  should  be  made  to 
ascertain  whether  the  plant  under  appraisement  is  suitable  for  the  purpose 
for  which  it  is  being  used.  In  the  illustration  cited  in  the  preceding  section, 
the  statement  is  made  that  a  plant  serving  1,000  subscribers  would  average 
about  $50  a  station  for  the  reproduction  cost  of  the  physical  property. 
Obviously,  a  plant  with  so  low  a  reproduction  cost  per  station  would  have 
to  be  composed  largely  of  open  wire,  and  the  subscribers  would  have  to  be 
close  enough  together  to  eliminate  long  runs. 

A  condition  might  exist  where,  although  $50  a  station  represented  a  fan- 
reproduction  cost  valuation  of  the  plant  under  consideration,  it  would  be 
advisable  to  replace  portions  of  the  wire  plant  by  aerial  cable,  and  perhaps 
even  to  build  a  small  amount  of  underground  plant. 


FUNCTION  OF  THE  APPRAISAL  IN  RATE-MAKING    191 

In  such  a  case  it  may  be  argued  —  and  rightly  so  —  that  rates  based 
upon  a  reproduction  cost  valuation  of  the  property,  as  it  stands  at  the 
date  of  appraisal,  would  be  entirely  too  low.  The  owners  may  contend 
that  the  contemplated  improvements  would  so  increase  the  investment 
that  rates  based  upon  a  valuation  of  $50  per  station  would  be  inadequate 
to  permit  them  to  properly  maintain  the  plant,  furnish  good  service,  and 
still  earn  a  fair  return  on  their  investment. 

Again,  it  may  happen  that  the  valuation  of  a  telephone  properly  dis- 
closes the  fact  that  the  plant  is  more  elaborate  than  the  operating  con- 
ditions warrant.  For  instance,  if  the  1,000-station  plant  we  have  been 
considering  showed  a  reproduction  cost  of  $100  per  station  for  the  physical 
property  alone,  and  further  analysis  proved  that  the  company  was  pos- 
sessed of  an  excessive  amount  of  costly  underground  conduit  construction, 
it  would  obviously  be  unfair  to  force  the  subscribers  to  pay  rates  based 
upon  the  $100  per  station  valuation.  In  other  words,  the  appraisal  en- 
gineer must  not  only  assure  himself  that  the  valuation  of  the  property  is 
a  fair  one,  but  he  must  also  determine  whether  or  not  the  plant  is  suitable 
to  fulfill  the  requirements  of  the  case  in  hand. 

If  the  plant  is  inadequate,  either  due  allowance  should  be  made  for 
this  fact  in  determining  the  rates,  or  the  rate  investigation  should  be  post- 
poned until  the  company  has  installed  all  of  the  plant  and  equipment 
necessary  to  furnish  good  service  to  its  subscribers,  and  until  it  is  in  a 
position  to  submit  a  fair  valuation  of  the  reconstructed  property.  If  the 
plant  is  overbuilt  it  may  be  necessary  to  shade  the  reproduction  cost 
valuation  a  little  so  that  the  subscribers  will  not  be  forced  to  pay  for  a 
lack  of  engineering  foresight  in  planning  the  property. 

328.  Operating  Expenses.  —  The  operating  expenses  of  a  telephone 
company  may  be  divided  into  four  general  headings,  maintenance  ex- 
penses, traffic  expenses,  commercial  expenses,  and  general  or  miscellaneous 
expenses. 

The  maintenance  expenses  include  such  items  as  repairs,  salaries,  office 
and  traveling  expenses  of  superintendents  and  their  assistants  who  are 
directly  in  charge  of  the  maintenance  of  the  telephone  plant. 

Traffic  expenses  include  salaries,  traveling  and  office  expenses  of  the 
forces  engaged  in  the  supervision  of  traffic;  salaries  of  telephone  operators; 
cost  of  miscellaneous  office  supplies;  cost  of  rest  and  lunch  rooms;  cost 
of  operators'  schooling;  cost  of  central  office  stationery  and  printing,  etc. 

Commercial  expenses  include  the  cost  of  advertising,  canvassing, 
accounting,  collections,  etc. 

The  general  expenses  include  the  salaries  of  general  officers,  the  salaries 
of  general  office  clerks,  expenses  incurred  for  stationery,  supplies,  cost  of 
legal  advice,  insurance,  amounts  paid  for  accidents  and  damages,  and 
all  of  the  other  miscellaneous  expenses  which  cannot  be  classified  under 
the  headings,  "Maintenance,"  "Traffic"  and  "Commercial." 


192  TELEPHONE  RATES  AND  VALUES 

Ordinarily,  depreciation  would  be  considered  as  a  part  of  the  main- 
tenance expenses.  However,  for  the  purpose  of  the  illustration,  the  item 
of  depreciation  is  being  considered  separately.  In  fact,  many  public 
utilities,  other  than  telephone  companies,  consider  depreciation  as  a  deduc- 
tion from  net  operating  revenue  rather  than  as  a  part  of  the  operating 
expenses. 

329.  Annual  Depreciation.  —  It  is  hardly  necessary  to  dwell  at 
length  upon  the  subject  of  annual  depreciation.     This  subject  has  been 
discussed  in  considerable  detail  in  the  foregoing  chapter.     It  might  be 
stated  that  in  determining  the  amount  of  annual  depreciation  it  is  first 
necessary  to  ascertain  the  reproduction  cost  of  the  physical  property  and 
the  respective  lives  and  salvage  values  of  the  component  elements.    An 
annual  depreciation  fund  is  then  built  up  which  will  meet  the  require- 
ments of  the  case  under  consideration. 

330.  Revenue.  —  Revenue  of  a  telephone  company  may  be  divided 
into  three  general  classifications,  —  exchange  service  revenue,  toll  service 
revenue,  and  miscellaneous  operating  revenue. 

The  exchange  service  revenue,  as  the  term  suggests,  includes  the 
revenues  derived  directly  from  the  sale  of  exchange  service. 

The  meaning  of  the  term  "toll  service  revenue"  is  also  apparent.  Any 
telephone  company  of  appreciable  size  has  some  provision  for  toll  service. 
It  may  not  own  its  own  toll  lines,  but  it  at  least  will  have  an  operating 
agreement  with  some  larger  company  whereby  its  subscribers  may  receive 
the  benefit  of  toll  service. 

If  the  company  owns  the  toll  lines,  naturally  all  of  the  revenue  derived 
from  toll  service  will  be  included  in  the  item  "Toll  Service  Revenue." 
If  the  company  does  not  own  the  toll  lines,  it  probably  will  have  a  working 
agreement  with  a  toll  transmission  company  whereby  it  will  receive  a 
certain  percentage  of  the  gross  revenue  resulting  from  toll  service.  In 
'a  case  of  this  kind  the  percentage  thus  received  will  be  chargeable  to  toll 
service  revenue. 

Miscellaneous  operating  revenue  includes  such  items  as  rentals  for 
private  or  leased  lines,  messenger  service,  telegraph  commissions,  revenues 
derived  from  advertising  in  the  directory,  rentals  from  subleased  property, 
etc. 

331.  Rate  of  Return.  —  The  rate  of  return  which  a  telephone  com- 
pany may  expect  to  derive  from  its  investment  is  largely  dependent  upon 
the  attitude  of  the  utility  commission  under  whose  jurisdiction  the  com- 
pany operates.    In  many  States  8  per  cent  is  considered  a  fair  rate  of 
return. 

This  question  of  the  return  which  should  be  allowed  to  investors  in 
public  utility  properties  is  a  delicate  one.  It  is  certain,  however,  that  no 
sane  investor  will  consider  buying  the  stock  of  a  utility  corporation  unless 


FUNCTION  OF  THE  APPRAISAL  IN  RATE-MAKING    193 

he  can  be  assured  that  he  will  obtain  a  larger  return  than  he  could  if  his 
funds  were  invested  in  mortgages  or  bonds.  It  is  a  well-known  fact  that 
first  mortgages  on  farms,  and  sometimes  on  city  property,  can  be  obtained 
which  will  net  a  return  of  6  per  cent.  All  things  considered,  8  per  cent 
may  be  assumed  to  be  a  fair  return  on  an  investment  in  telephone  stock, 
and  this  percentage  will  be  used  in  the  illustrations  cited  in  the  present 
chapter. 

332.  First  Step  in  Illustrative  Rate  Investigation.  —  With  the 
aid  of  the  foregoing  general  discussion  of  the  various  factors  that  enter 
into  a  rate  problem,  and  with  the  help  of  the  simple  illustration  given 
previously,  the  reader  will  be  able  to  readily  follow  the  analysis  of  a  more 
complicated  rate  problem. 

It  will  be  assumed  that  a  company  located  in  a  town  of  about  10,000 
population  is  giving  exchange  service  to  about  3,000  subscribers,  and 
that  it  has  applied  to  the  State  publicity  utility  commission  for  permission 
to  increase  its  rates.  To  simplify  the  illustration,  it  will  be  assumed  that 
the  rates  for  exchange  service  are  the  only  ones  involved  in  the  investiga- 
tion, and  that  toll  service  is  supplied  by  a  separate  toll  company.  In  a 
case  of  this  kind  the  only  revenue  derived  from  toll  service  by  the  ex- 
change company  would  be  in  the  form  of  a  percentage  on  the  total  receipts 
from  toll  calls  originating  in  the  company's  territory. 

Naturally,  the  first  step  in  a  rate  investigation  of  the  kind  under  con- 
sideration will  involve  a  complete  valuation  of  the  company's  physical 
property  and  of  the  attached  business.  For  the  purpose  of  this  discussion 
it  is  unnecessary  to  outline  the  various  steps  involved  in  the  appraisal, 
this  phase  of  the  subject  having  been  discussed  quite  thoroughly  in  pre- 
vious chapters.  It  will  be  assumed  that  a  careful  engineering  valuation 
has  been  made  of  both  the  physical  property  and  of  the  so-called  "  in- 
tangible assets." 

333.  The  Inventoriable  Property.  —  The  result  of  the  appraisal  of 
the  physical  property  is  shown  in  Fig.  52.   It  will  be  noted  that  the  account- 
ing system  of  the  Interstate  Commerce  Commission  has  been  followed  in 
determining  the  general  arrangement  of  what  may  be  called  the  "in- 
ventoriable  property."    Under  the  heading  "Distribution  System"  are 
grouped  all  of  the  elements  of  outside  plant,  such  as  poles,  cross  arms, 
aerial  cable,  underground  cable,  conduit,  etc. 

It  will  also  be  noted  that  suitable  allowances  have  been  included  to 
cover  the  cost  of  contingencies,  warehouse  and  purchasing  expense,  tool 
expense  and  the  collateral  construction  costs.  If  the  reader  is  in  doubt 
as  to  the  significance  of.  or  as  to  the  method  of  determining,  any  of  these 
items  it  is  suggested  that  he  review  the  respective  chapters  in  which  the 
direct  and  collateral  costs  are  discussed. 

334.  Total  Value  of  Property.  —  Fig.  53,  entitled  "Total  Cost  of 
Plant  and  Business,"  gives  the  total  value  of  the  property  on  a  reproduction 


194 


TELEPHONE  RATES  AND  VALUES 


Reproduction 
Cost. 

Present 
Value. 

Direct  construction  costs:  — 

Right  of  way,        

$2,000 

$2,000 

Land  

4,000 

4,000 

Buildings  

25,000 

20,000 

Central  office  equipment,     

25,000 

18,000 

Subscriber's  station  equipment,  

28,000 

20,000 

Distribution  system,    

120,000 

80,000 

General  equipment,      

4,000 

3,000 

Material  and  supplies,           

4,500 

4,000 

Total  inventoriable  property,        ..... 

$212,500 

$151,000 

Incidentals  and  contingencies,     

6,000 

4,200 

Warehouse  and  purchasing  expense,    

5,000 

3,500 

Tools  and  tool  expense,        

2,500 

1,800 

Total  direct  construction  costs,      

$226,000 

$160,500 

Collateral  construction  costs  :  — 

General  and  legal  expense,  

$10,000 

$7,100 

Engineering  and  general  supervision,           .         ;         .         . 

12,000 

8,500 

Insurance  and  taxes  during  construction  

2,000 

1,400 

Interest  during  construction,        

12,000 

8,500 

Total  collateral  construction  costs  

$36,000 

$25,500 

Total  physical  property  

$262,000 

$186,000 

FIG.  52.  —  Summary  of  physical  property  of  the  Independent  Home  Telephone  Company. 

basis  as  of  the  appraisal  date.    The  reproduction  cost  of  the  physical 
property  is,  of  course,  obtained  from  Fig.  52.    Cost  of  franchises,  cost  of 


Reproduction  cost  of  physical  property, 
Cost  of  franchises,     ..... 
Cost  of  establishing  business, 
Cost  of  financing, 
Working  capital, 

Total  cost  of  plant  and  business  as  of  appraisal  date, 

FIG.  53.  —  Total  cost  of  plant  and  business. 


$262,000 

1,000 

50,000 

30,000 

7,500 

$350,500 


establishing  business,  cost  of  financing,  and  the  amount  allowed  for  working 
capital  have  all  been  computed  by  the  methods  suggested  in  previous 
chapters. 


FUNCTION  OF  THE  APPRAISAL  IN  RATE-MAKING    195 

The  total  value  of  the  property,  including  the  business,  is  $350,500, 
and  it  may  be  assumed  that  this  value  has  been  submitted  to  a  commission 
as  representing  the  investment  upon  which  the  appraisal  engineers  feel 
that  their  clients  are  entitled  to  earn  a  fair  return. 

If  we  assume  that  the  commission  before  whom  the  rate  case  is  to  be 
adjudicated  has  ruled  that  telephone  companies  are  entitled  to  a  net 
income  of  8  per  cent  on  a  fair  valuation  of  their  property,  the  company 
under  discussion  should  have  a  net  income  of  about  $28,000,  —  8  per 
cent  of  $350,000.  The  next  step,  therefore,  involves  a  careful  analysis 
of  the  revenue  and  expense  accounts. 

335.  Analysis  of  the  Operating  Revenues.  —  In  Fig.  54,  entitled 
"Operating  Revenue  Analysis,"  is  given  a  detailed  analysis  of  the  com- 


Account 
No. 

ITEM. 

Revenues. 

500 

Subscribers'  station  revenues,          

$50,000 

501 

Public  pay  station  revenues,  

500 

502 

Miscellaneous  station  revenues,       

100 

Total  exchange  service  revenues,      

.     $50,600 

510 

Toll  messages,           

$5,000 

511 

Miscellaneous  toll  line  revenues,      

- 

Total  toll  service  revenues,        

5,000 

520 

Messenger  service,    

$50 

521 

Telegraph  commission,    

- 

522 

Other  telegraph  charges,          

- 

523 

Advertising  and  printing,        

200 

524 

Rents  from  other  operating  property  

- 

525 

Other  miscellaneous  revenues,         

- 

526 

Licensee  revenues,  Cr  

_ 

527 

Licensee  revenues,  Dr  , 

Total  miscellaneous  operating  revenues,  

250 

Total  operating  revenues,          

.     $55,850 

FIG.  54.  —  Operating  revenue  analysis. 


pany's  various  revenues  for  the  fiscal  year  immediately  preceding  the  date 
of  appraisal.  It  has  been  assumed  that  the  company's  books  are  kept  in 
accordance  with  the  instructions  of  the  Interstate  Commerce  Commission. 
In  the  first  column  of  Fig.  54  the  various  accotint  numbers  are  listed; 
in  the  second  column,  the  corresponding  descriptive  headings  used  by  the 


196        TELEPHONE  RATES  AND  VALUES 

Interstate  Commerce  Commission;  in  the  third  column,  the  operating 
revenues  as  taken  from  the  company's  books;  and  in  the  fourth  column, 
the  total  operating  revenues  as  subdivided  under  the  three  major  classi- 
fications prescribed  by  the  Interstate  Commerce  Commission. 

It  may  be  well  to  consider  the  various  operating  revenue  accounts  in 
some  detail  before  taking  up  the  subject  of  operating  expenses.  The 
operating  revenue  of  a  telephone  company  is  divided  by  the  Interstate 
Commerce  Commission  into  three  general  classifications,  —  "exchange 
service  revenue,"  "toll  service  revenues,"  and  "miscellaneous  operating 
revenues." 

"Exchange  service  revenues"  are  subdivided  into  subscribers'  station 
revenues,  public  pay  station  revenues  and  miscellaneous  exchange  service 
revenues. 

"Toll  service  revenues"  are  subdivided  into  message  tolls  and  mis- 
cellaneous toll  line  revenues. 

"Miscellaneous  operating  revenues"  are  subdivided  into  messenger 
service;  telegraph  commissions;  other  telegraph  charges;  advertising 
and  directory;  rents  from  other  operating  property;  other  miscellaneous 
revenue;  licensee  revenue,  Cr.;  and  licensee  revenue,  Dr. 

336.  Subscribers'  Station  Revenues.  —  Under  account  500  of  the 
Interstate  Commerce  Commission's  system  should  be  included  all  revenues 
derived  from  the  subscribers  for  strictly  exchange  service.    In  other  words, 
it  should  include  the  revenues  derived  from  rentals  for  telephones,  ex- 
tension stations,  private  branch  exchanges,  extra  listing  in  directory,  etc. 

In  the  case  under  consideration  it  will  be  noted  that  the  revenue  from 
the  subscribers'  stations  is  the  largest  source  of  income,  amounting  to 
$50,000.  This  is  to  be  expected  as  the  result  of  our  assumption  that  the 
company  is  primarily  engaged  in  giving  exchange  service,  and  that  the 
toll  service  is  supplied  by  a  separate  company  which  allows  the  exchange 
company  only  a  percentage  of  the  total  toll  receipts. 

337.  Public  Pay  Station  Revenues.  —  Under  account  501  of  the 
Interstate  Commerce  Commission's  accounting  system  should  be  included 
all  revenues  derived  from  exchange  service  originating  at  public  pay 
stations.    Some  companies,  the  Chicago  Telephone  Company,  for  instance, 
follow  the  practice  of  installing  coin  boxes  in  connection  with  the  telephones 
of  certain  of  their  regular  subscribers.    Of  course  coin  boxes  used  in  this 
way  do  not  constitute  public  pay  stations;  they  are  merely  a  part  of  the 
subscriber's  equipment. 

The  amount  credited  to  account  501  should  be  the  gross  amount  col- 
lected, including  commissions  to  pay  station  attendants  or  others  who  may 
be  entitled  to  a  commission  for  making  pay  station  collections.  Com- 
missions of  this  nature  are  considered  as  a  part  of  the  operating  expenses, 
and  will  be  discussed  in  a  subsequent  portion  of  this  chapter. 


FUNCTION  OF  THE  APPRAISAL  IN  RATE-MAKING     197 

In  Fig.  54  public  pay  station  revenues  have  been  given  as  $500,  a 
relatively  small  amount  when  compared  with  the  subscriber's  station 
revenues  of  $50,000. 

338.  Miscellaneous    Exchange    Service    Revenue.  —  Under   Mis- 
cellaneous Exchange  Service  Revenues,  Account  502,  should  be  included 
all  revenues  derived  from  exchange  service  other  than  those  just  con- 
sidered.   In  the  Interstate  Commerce  Commission's  system  of  account- 
ing,  " miscellaneous  exchange  service  revenues"  are  divided  into  four 
sub-accounts,  as  follows :  — 

Service  Stations,  Account  503. 
Private  Exchange  Lines,  Account  504. 
Minor  Rents  of  Exchange  Plants,  Account  505. 
Other  Exchange  Revenues,  Account  506. 

339.  The    Sub-accounts    of    Miscellaneous    Exchange    Service 
Revenues.  —  Under  Service  Stations,  Account  503,  should  be  included 
switching  charges  and  other  revenues  derived  from  equipment  owned  or 
partially  owned  by  other  companies,  and  to  which  the  company  under 
consideration  furnishes  exchange  service. 

Under  Account  504,  Private  Exchange  Lines,  should  be  included  all 
revenues  derived  from  telephone  plant  leased  to  others  for  private  pur- 
poses, but  not  connected  so  as  to  afford  the  lessee  "telephone  communica- 
tion with  other  subscribers  in  the  system. 

Under  Minor  Rents  of  Exchange  Plant,  Account  505,  should  be  included 
such  revenues  as  may  accrue  to  the  company  from  the  lease  of  ducts  in 
conduit  systems  or  for  the  use  of  pole  lines. 

Account  506,  Other  Exchange  Revenues,  should  include  all  exchange 
revenues  not  provided  for  elsewhere. 

No  attempt  has  been  made  to  segregate  the  various  revenues  assigned 
to  Account  502,  Miscellaneous  Exchange  Revenues,  as  given  in 'Fig.  54. 
It  has  been  assumed  that  a  very  small  revenue  —  $100  —  will  accrue  to 
the  company  from  one  or  more  of  the  four  sources  just  considered. 

340.  Toll  and  Miscellaneous   Operating  Revenues.  —  The  total 
exchange  service  revenues,  as  given  in  Fig.  54,  amount  to  $50,600  and 
constitute  the  principal  source  of  income  for  the  company  under  con- 
sideration.   It  will  be  noted  that  a  revenue  of  $5,000  has  been  assumed  for 
toll  service,  and  a  revenue  of  $250  for  miscellaneous  service. 

Notwithstanding  the  fact  that  these  latter  sources  of  revenue  are  im- 
material to  our  present  problem.  —  inasmuch  as  we  have  already  assumed 
that  the  company  whose  rates  are  under  investigation  is  engaged  primarily 
in  supplying  exchange  service,  —  it  may  be  well  to  briefly  consider  the 
various  sources  of  toll  and  miscellaneous  operating  revenue  to  help  the 
reader  in  the  solution  of  his  own  rate  problems.  Many  companies  have 


198        TELEPHONE  RATES  AND  VALUES 

an  appreciable  income  from  the  various  sources  of  toll  and  miscellaneous 
operating  revenue,  as  listed  in  Fig.  54. 

341.  Toll  Messages,  Account  510.  —  Under  the  account  Toll  Mes- 
sages should  be  included  all  revenues  accruing  from  messages  transmitted 
over  the  company's  lines  between  stations  located  in  different  exchange 
areas,  and  for  which  a  toll  charge  is  made  over  and  above  the  contract 
charge  for  exchange  service.    To  this  account  should  also  be  charged  the 
proportion  of  the  total  toll  revenues  accruing  to  operating  companies  on 
messages  transmitted  over  toll  lines  belonging  to  other  companies. 

In  Fig.  54  it  has  been  assumed  that  the  gross  revenue  to  the  company 
under  investigation  amounts  to  $5,000.  In  this  case  we  have  assumed 
that  the  operating  company  does  not  own  the  toll  lines,  and  the  $5,000 
toll  revenue,  therefore,  represents  the  company's  commission  on  toll 
business  originating  with  its  own  subscribers  but  transmitted  over  lines 
belonging  to  another  company. 

342.  Miscellaneous  Toll  Line  Revenues,  Account  511.  —  To  the 
miscellaneous   toll  line   revenues   account   should   be   charged  all  toll 
revenues  except  those  discussed  in  the  preceding  paragraphs.     In  the 
accounting  system  of  the  Interstate  Commerce  Commission  the  revenues 
accruing  from  miscellaneous  toll  sources  are  divided  into  five  classifications, 
as  follows :  — 

Leased  Toll  Lines,  Account  512. 

Telegraph  Tolls,  Account  513. 

Telegraph  Service  on  Toll  Lines,  Account  514. 

Minor  Rents  of  Toll  Plant,  Account  515. 

Other  Toll  Line  Revenues,  Account  516. 

343.  Miscellaneous  Toll  Line  Revenues.  —  To  simplify  the  problem 
under  consideration  it  has  been  assumed  that  the  company  does  not  derive 
any  revenue  from  miscellaneous  toll  sources.     In  fact,  our  assumption 
that  the  toll  service  is  furnished  by  another  company,  and  that  the  com- 
pany under  consideration  does  not  own  any  toll  plant,  precludes  the  pos- 
sibility of  miscellaneous  toll  revenues.    The  revenues  which  would  ordi- 
narily accrue  from  the  five  sources  of  "miscellaneous  toll  line  revenues" 
may,  perhaps,  best  be  described  by  quoting  the  language  of  the  Interstate 
Commerce  Commission:  — 

Leased  Toll  Lines,  Account  512.  —  This  account  should  include  all  revenues 
derived  from  toll  lines  (including  the  terminal  exchange  circuits)  leased  by  others 
under  contracts  giving  exclusive  telephone  use  either  continuously  or  during 
stated  periods.  Such  plant  may  be  leased  in  connection  with  private  branch 
exchange  or  private  exchange  line  installations. 

Note:  Revenues  from  private  branch  exchanges  or  private  lines,  the  contracts 
for  which  provide  for  the  use  of  toll  circuits,  should  be  divided  (by  estimate,  if 
necessary)  between  exchange  revenue  and  toll  revenue. 


FUNCTION  OF  THE  APPRAISAL  IN  RATE-MAKING     199 

Telegraph  Tolls,  Account  513.  —  This  account  should  include  all  revenues  re- 
ceived from  telegraph  companies  for  the  use  of  toll  lines  for  telephoning  telegrams 
and  cablegrams. 

Telegraph  Service  on  Toll  Lines,  Account  514-  —  This  account  should  include  all 
revenues  derived  from  the  use  of  toll  lines  for  telegraph  circuits,  whether  such 
lines  are  used  by  telegraph  companies,  brokers  or  others. 

Minor  Rents  of  Toll  Plant,  Account  515.  —  This  account  should  include  all 
revenues  derived  from  attachments  to  toll  poles,  the  use  of  toll  conduits,  and 
other  minor  rents  from  toll  plant  where  such  property  is  maintained  by  the  ac- 
counting company  and  the  cost  of  such  maintenance  cannot  be  separated  from 
expense  of  maintaining  the  rented  property.  This  account  should  not  include 
rents  from  equipment  leased  to  licensees  under  an  arrangement  for  a  division  of 
revenues  as  provided  for  in  Account  526,  Licensee  Revenue,  Cr. 

Other  Toll  Line  Revenues,  Account  516.  —  This  account  should  include  all  toll 
line  revenues  not  provided  for  elsewhere. 

344.  Miscellaneous    Operating    Revenues.  —  Referring    again    to 
Fig.  54,  it  will  be  noted  that  the  "miscellaneous  operating  revenues" 
include  all  of  the  miscellaneous  revenues  resulting  from  operation.     In 
other  words,  this  group  of  accounts  is  a  sort  of  a  catchall  for  the  various 
minor  sources  of  revenue  resulting  from  operation  which  cannot  be  attrib- 
uted either  to  exchange  or  to  toll  operation. 

In  the  illustration  cited  in  Fig.  54,  it  has  been  assumed  that  the  com- 
pany will  realize  very  little  revenue  from  miscellaneous  sources.  A  revenue 
of  $50  is  derived  from  messenger  service;  and  a  revenue  of  $200  from  the 
sale  of  advertising  space  in  the  company's  directory.  Despite  the  fact 
that  the  miscellaneous  operating  revenue  accounts  play  so  small  a  part  in 
our  present  problem,  it  is  proposed  to  outline  briefly  the  scope  of  each  of 
these  accounts  as  an  aid  to  the  reader  in  the  solution  of  his  own  accounting 
problems. 

345.  Messenger  Service.  —  Under  Messenger  Service,  Account  520, 
should  be  included  all  of  the  revenue  derived  from  messenger  service.    It 
frequently  happens  that  toll  calls  are  received  for  people  who  are  not 
subscribers  to  the  local  telephone  service. 

In  cases  of  this  kind  it  is  necessary  to  send  a  messenger  to  advise  the 
called  party  that  he  is  wanted  on  the  long  distance  telephone,  and  any 
revenue  that  may  accrue  from  the  delivery  of  such  messages  should  be 
charged  to  account  520. 

346.  Telegraph  Commissions.  —  To  account  521  should  be  charged 
all  commissions  received  by  the  operating  telephone  company  for  the 
collection  of  telegraph  and  cable  charges. 

It  sometimes  happens  that  a  local  telephone  company  will  have  an 
arrangement  with  a  telegraph  or  a  trans-ocean  cable  company  whereby  it 
makes  collections  of  telegraph  and  cable  charges,  and  for  so  doing  receives 
a  commission. 

347.  Other  Telegraph  Service  Charges.  —  To  account  522  should 


200        TELEPHONE  RATES  AND  VALUES 

be  charged  all  revenues  other  than  telegraph  and  cable  commissions 
received  from  telegraph  companies  for  services  rendered  by  a  telephone 
company's  employees. 

Frequently  a  telegraph  company  will  establish  a  branch  office  in  the 
commercial  office  of  the  local  telephone  company.  In  cases  of  this  kind 
telephone  employees  receive  messages  from  the  public  and  quote  rates. 
All  revenues  accruing  from  the  telegraph  company  for  such  services  should 
be  charged  to  "other  telegraph  service  charges." 

348.  Advertising  and  Directory.  —  A  telephone  directory  is  often  a 
fruitful  source  of  revenue,  especially  in  the  larger  cities.    All  revenues 
received  from  directory  advertising,  or  from  any  other  advertising  source, 
should  be  charged  to  account  523. 

349.  Rents  from  Other  Operating  Property.  —  All  revenues  derived 
from  leasing  poles,  wires,  cables,  conduit  and  equipment  should  be  charged 
to  Accounts  505  and  515,  —  Exchange  and  Toll  Minor  Rent,  —  respec- 
tively.   All  revenues  derived  from  the  rental    of   buildings    and    other 
property,  when  such  property  is  used  by  both  telephone  company  and  the 
lessee,  should  be  charged  to  Rents  from  Other  Operating  Property,  Ac- 
count 524. 

350.  Other  Miscellaneous  Revenues,  Account  525. —  To  "  Other 
miscellaneous  revenues"  should  be  charged  all  miscellaneous   operating 
revenues  which  cannot  be  allocated  to  any  of  the  accounts  enumerated 
in  the  foregoing  paragraphs. 

351.  Licensee  Revenues,  Cr.  Account.  —  To  quote  the  language  of 
the  Interstate  Commerce  Commission  in  its  instructions  for  telephone 
accounting  as  regards  the  Licensee  Revenue,  Credit,  Account  526:  — 

When  a  telephone  company  grants  another  telephone  company  the  use  of  its 
patents,  or  furnishes  instruments  and  equipment  and  general  supervision  under 
an  agreement  for  apportioning  the  revenues  of  the  licensee,  the  proportion  accru- 
ing to  the  licensor  should  be  included  by  the  licensor  in  this  account. 

352.  Licensee  Revenue,  Dr.  Account.  —  Again  quoting  the  Inter- 
state Commerce  Commission  with  reference  to  the  Licensee  Revenue, 
Dr.,  Account  527:  — 

When  a  telephone  company  is  granted  by  another  telephone  company  the  use 
of  its  patents,  or  is  furnished  instruments  and  equipment  and  general  supervision 
under  an  agreement  for  apportioning  the  revenues  of  the  licensee,  the  proportion 
accruing  to  the  licensor  should  bi  included  by  the  licensee  in  this  account. 

353.  Operating  Expenses.  —  All  of  the  possible  sources  of  operating 
revenue  have  now  been  considered.    The  telephone  company  may  have 
sources  of  revenue  other  than  operating  revenue,  but  this  phase  of  the 
problem  will  be  considered  in  a  later  portion  of  the  present  chapter. 


FUNCTION   OF  THE  APPRAISAL  IN  RATE-MAKING    201 

Obviously,  the  operating  expenses  must  receive  just  as  careful  analysis 
in  a  rate  problem  as  the  operating  revenue.  In  Fig.  55  operating  expenses 
have  been  assumed  for  the  company  whose  revenues  were  shown  in  Fig.  54. 

It  will  be  noted  that  in  Fig.  55  the  account  number,  as  prescribed  by  the 
Interstate  Commerce  Commission  for  the  accounting  of  Class  A  and  B 
telephone  companies,  is  shown  in  parentheses  immediately  after  the  title 
of  the  account. 

354.  Classification  of  Repairs.  —  Before  taking  up  the  consideration 
of  the  various  items  of  operating  expense  it  may  be  well  to  pause  for  a 
moment  and  consider  just  what  is  meant,  in  telephone  parlance,  by  the 
word  "repairs."    Repairs,  as  defined  in  the  accounting  instructions  of  the 
Interstate  Commerce  Commission,  include  both  " ordinary"  and  "ex- 
traordinary" repairs. 

355.  Ordinary  Repairs.  —  "Ordinary  repairs"  consist  of  the  costs 
involved  in  — 

1.  Testing  for  locating  and  clearing  line  troubles. 

2.  Routine  work  intended  to  prevent  such  troubles. 

3.  Replacement  of  minor  or  shortlived  parts  of  telephone  plant  and 
equipment. 

4.  Rearrangements  and  changes  in  the  location  of  plant,  except  sub- 
scribers' station  equipment,  which  is  cared  for  under  another  account. 

5.  Recovering  salvage  and  removing  retired  or  abandoned  property, 
except  subscribers'  station  equipment,  when  the  cost  of  such  work  is  not 
provided  for  specifically  by  the  depreciation  reserve  funds. 

Item  4,  "rearrangements  and  changes  in  location  of  plant,"  should 
include  such  costs  as  may  be  involved  in  reassociating  party  lines,  rearrang- 
ing trunk  and  calling  circuit  groups,  changing  the  cross  connection  wires 
on  distributing  frames,  re-running  jumper  wires,  etc. 

356.  Extraordinary  Repairs.  —  Under  "extraordinary  repairs "  should 
be  included  the  cost  of  — 

1.  Restoring  to  an  efficient  or  proper  condition  buildings  or  other  units 
of  property  which  have  deteriorated. 

2.  Substituting,  in  order  to  maintain  normal  efficiency,  new  parts  for 
old  parts  of  continuous  structures,  such  as  pole  lines,  cables,  wires,  con- 
duits, etc.,  where  such  substitutions  do  not  amount  to  a  practical  replace- 
ment of  any  considerable  length  of  such  continuous  structures. 

3.  Restoring  the  condition  of  property  damaged  by  storms,  floods,  fire 
or  other  casualties. 

4.  Recovering  salvage  and  removing  retired  or  abandoned  property  in 
connection  with  the  above  work. 

357.  Distinction  between  Ordinary  and  Extraordinary  Repairs.  — 
In  our  present  problem  we  are  only  interested  in  "ordinary"  repairs. 
"Extraordinary"  repairs,  notwithstanding  the  fact  that  they  are  charged 


202 


TELEPHONE  RATES  AND  VALUES 


Maintenance  Expenses. 
Supervision  of  maintenance  (601), 
Repairs  of  aerial  plant  (602),      . 
Repairs  of  underground  plant  (603) ,    . 
Repairs  of  central  office  equipment  (604) ,    . 
Repairs  of  subscribers'  equipment  (605), 
Repairs  of  buildings  and  grounds  (606), 
Station  removals  and  changes  (607),    . 
Depreciation  of  plant  and  equipment  (608), 
Extraordinary  depreciation  (609), 
Other  maintenance  expenses  (610), 

Total  maintenance  expenses, 


$500 

3,750 

1,240 

1,530 

2,480 

600 

300 

19,650 

1,600 


$31,650 


Traffic  Expenses. 

Central  office  superintendence  (620),  . 
Operators'  wages  (624),      . 
Central  office  supplies  and  expenses  (625),   . 
Pay  station  expenses  (632) , 
Other  traffic  expenses  (633),        . 


$500 

10,500 

500 

150 


Total  traffic  expenses, 


11,650 


Commercial  Expenses. 
Commercial  administration  (640), 
Promotion  expenses  (641), 

Collection  expenses  (645),  .... 

Directory  expenses  (649),  . 
Other  commercial  expenses  (650), 

Total  commercial  expenses, 


$500 
200 

1,200 
600 
100 


2,600 


General  and  Miscellaneous  Expenses. 
General  office  salaries  (660), 
General  office  supplies  and  expenses  (663),  . 
General  law  expenses  (667), 
Insurance  (668),         .... 
Accidents  and  damages  (669),     . 
Law  expenses  connected  with  damages  (670), 
Miscellaneous  general  expense  (671),  . 

Total  general  and  miscellaneous  expenses, 

Total  operating  expenses,     . 

FIG.  55.  —  Operating  expen  ses. 


$2,500 

900 

100 

600 

100 

50 

1,000 


5,250 


.   $51,150 


FUNCTION  OF  THE  APPRAISAL  IN  RATE-MAKING    203 

to  the  primary  operating  expense  accounts,  are  not  operating  expenses. 
Eventually  they  are  cared  for  by  the  depreciation  reserve  fund.  This 
fact  should  be  significant  to  the  reader  in  that  it  furnishes  the  clue  to  the 
real  distinction  between  "ordinary"  and  "extraordinary"  repairs. 

"Ordinary"  repairs  include  only  the  minor  maintenance  charges  neces- 
sary to  the  upkeep  of  the  plant.  "Extraordinary"  repairs  are  those 
necessary  to  put  the  plant  back  in  good  working  order  after  it  has  been 
allowed  to  depreciate,  and  naturally  they  must  be  paid  for  out  of  the 
funds  provided  for  the  especial  purpose  of  offsetting  depreciation. 

The  "ordinary"  repairs,  as  given  in  Fig.  55,  include  the  wages  and 
expenses  of  employees  while  engaged  in  repair  work  and  the  cost  of  all 
materials  used  for  repair  purposes. 

358.  Supervision  of  Maintenance. — The  salaries,  office  and  traveling 
expenses  of  superintendents,  and  other  auxiliary  forces  that  are  directly 
in  charge  of  the  maintenance  of  the  telephone  plant,  should  be  charged  to 
Account  601,  Supervision  of  Maintenance.    Such  items  as  office  supplies, 
office  rentals,  light,  heat  and  miscellaneous  office  expenses,  where  separate 
offices  are  maintained  for  the  maintenance  of  supervision  forces,  should 
also  be  charged  to  this  account. 

In  the  case  illustrated  in  Fig.  55,  it  will  be  noted  that  $500  has  been 
charged  to  "supervision  of  maintenance."  In  all  probability,  in  the  case 
of  a  company  as  small  as  the  one  under  consideration  the  manager  would 
have  general  supervision  over  the  maintenance  forces. 

In  this  event,  a  part  of  his  time  would  be  chargeable  against  the  Account 

601,  Supervision  of  Maintenance,  and  it  is  on  this  basis  that  the  figure  of 
$500  has  been  determined.    In  other  words,  the  salary  and  expenses  of 
the  general  manager  and  his  assistants  have  been  prorated  against  the 
maintenance,  traffic,  commercial  and  general  expense  accounts. 

359.  Repairs  of  Aerial  Plant.  —  To  Repairs  of  Aerial  Plant,  Account 

602,  should  be  charged  the  cost  of  ordinary  repairs  incurred  in  the  main- 
tenance of  aerial  plant,  such  as  pole  lines,  aerial  cables,  aerial  wires,  drop 
wires  and  all  auxiliary  appurtenances. 

The  cost  of  trimming  trees  and  clearing  and  removing  obstructions  from 
right  of  way,  where  such  costs  are  incurred  in  connection  with  maintaining 
the  plant,  should  also  be  charged  to  account  602. 

In  the  case  under  consideration  the  repairs  to  the  aerial  plant  have  been 
estimated  at  $3,750,  or  $1.25  per  station. 

360.  Repairs  of  Underground  Plant.  —  The  cost  of  repairs  of  all 
plant  which  may  be  classified  as  "underground  plant"  should  be  charged 
to  Account  603,  Repairs  of  Underground  Plant.    Underground  plant,  it 
will  be  remembered,  includes  underground  cables  and  conduits,  submarine 
cables,  loading  coils,  cable  boxes  and  all  of  the  auxiliary  equipment  per- 
taining to  an  underground  distribution  system. 


204        TELEPHONE  RATES  AND  VALUES 

The  costs  of  maintaining  paving  over  conduit  systems,  where  such  costs 
are  in  the  nature  of  maintenance  charges,  are  chargeable  to  this  account. 

In  the  present  case  the  repairs  of  the  underground  plant  have  been 
estimated  at  $1,240,  or  slightly  over  40  cents  a  station. 

361.  Repairs  of  Central  Office  Equipment. — To  Repairs  of  Central 
Office  Equipment,  Account  604,  should  be  charged  the  cost  of  repairing 
telephone  equipment  in  the  central  offices.    This  includes  cost  of  repairs 
to  switchboards,  monitors'  and  supervisors'  desks,  wire  chiefs'  desks,  main 
and  intermediate  frames,  central  office  cables,  cross  connection  wires, 
power  generating  apparatus,  storage  batteries,  and  all  of  the  auxiliary 
equipment  used  in  operating  the  central  office. 

In  the  illustration  given  in  Fig.  55,  the  cost  of  central  office  repairs 
has  been  estimated  at  $1,530,  about  30  cents  a  station. 

362.  Repairs  of  Station  Equipment.  —  The  cost  of  repairing  station 
apparatus,  such  as  telephone  sets,  intercommunicating  sets,  bells,  coin 
boxes,  protectors,  etc.,  should  be  charged  to  account  605.    In  this  con- 
nection it  should  be  noted  that  the  cost  of  renewals  of  local  batteries  is 
not  chargeable  to  account  605,  but  rather  to  Account  628,  Transmission 
Power. 

In  Fig.  55  the  cost  of  repairs  to  subscribers'  station  equipment  has  been 
estimated  at  $2,480,  or  slightly  over  80  cents  a  station. 

363.  Repairs  of  Buildings  and  Grounds.  —  To  Real  Estate  Repair, 
Account  606,  should  be  charged  the  cost  of  ordinary  repairs  to  buildings 
and  whatever  maintenance  work  may  be  necessary  to  keep  the  land  on 
which  the  buildings  are  located  in  good  condition.    Among  other  items 
chargeable  to  this  account  are  cost  of  repairing  elevators,  plumbing, 
heating  apparatus,  lighting  equipment  and  cost  of  maintaining  fences, 
sidewalks  and  sewer  connections. 

In  the  case  under  consideration  the  cost  of  repairs  to  buildings  and 
grounds  has  been  estimated  at  20  cents  a  station. 

364.  Station  Removals  and  Changes.  —  To  account  607  should 
be  charged  the  cost  of  disconnecting,  removing  and  changing  the  location 
of  all  plant  which  may  be  classified  as  subscribers'  station  equipment. 

To  quote  the  language  of  the  Interstate  Commerce  Commission:  — 

When  stations  are  removed  (not  merely  changed  in  location)  from  subscribers' 
premises  the  original  cost  (estimated,  if  not  known)  of  the  station  should  be  credited 
to  the  appropriated  fixed  capital  accounts,  and  the  cost  of  the  instruments,  private 
branch  exchange  apparatus,  booths  and  fittings  should  be  charged  to  Account  122, 
Materials  and  Supplies;  while  the  cost  of  installation,  including  inside  wires  or 
interior  block  wires,  and  that  portion  of  aerial  wires  which  could  be  used  only  at 
the  subscribers'  premises  from  which  the  station  is  removed,  less  the  value  of  any 
salvage,  should  be  charged  to  this  account. 

If  wire  left  from  previous  installations  is  re-used,  either  on  the  same  or  under 
other  premises,  the  gain  should  be  credited  to  this  account.  This  includes  the 


FUNCTION  OF  THE  APPRAISAL  IN  RATE-MAKING    205 

gain  on  inside  wires  and  interior  block  wire,  and  on  that  portion  of  aerial  wire 
which  could  be  used  at  subscribers'  premises. 

When  stations  are  disconnected  but  left  on  premises,  charge  to  this  account  the 
cost  of  disconnecting;  and  when  reconnected,  the  cost  of  reconnecting. 

When  station  location  or  service  is  charged,  charge  to  this  account  the  cost  of 
such  changes,  less  the  improvement,  if  any,  properly  chargeable  to  "  fixed  capital " 
account  for  actual  additions  to  plant. 

Credit  to  this  account  amounts  charged  subscribers  for  removals  and  changes. 

Expressed  in  another  way,  the  station  removal  and  change  account 
covers  the  cost  of  numerous  changes  in  the  location  of  all  subscriber's 
station  equipment,  which  is  necessarily  a  part  of  the  maintenance  of  any 
telephone  property.  In  the  case  under  consideration  the  cost  of  station 
removals  and  changes  has  been  estimated  at  $300,  or  10  cents  a  station. 

365.  Depreciation  of  Plant  and  Equipment.  —  To  Depreciation, 
Account  608,  should  be  charged  the  amount  which,  in  the  judgment  of  the 
rate  engineer,  is  necessary  to  offset  current  annual  depreciation.    In  the 
case  under  consideration  the  amount  chargeable  to  depreciation  has  been 
estimated  at  1\  per  cent  of  the  reproduction  cost  of  the  physical  property 
(see  Fig.  52).     Seven  and  one-half  per  cent  of  $262,000  equals  $19,650, 
the  sum  given  in  Fig.  55. 

366.  Extraordinary   Depreciation.  —  To   Extraordinary   Deprecia- 
tion, Account  609,  should  be  charged  monthly  such  an  amount  that, 
through  its  regular  application,  will  offset  any  amount  that  may  be  carried 
in  expenses  on  account  of  the  extraordinary  casualties,  such  as  those 
resulting  from  sleet  storms,  fires,  floods,  etc. 

In  the  present  illustration  no  allowance  has  been  made  for  extraordinary 
depreciation. 

367.  Other  Maintenance  Expenses.  —  Other  Maintenance  Expenses, 
Account  610,  includes  all  of  the  repair  and  maintenance  items  which  cannot 
be  readily  allocated  to  any  of  the  maintenance  accounts  previously  de- 
scribed. 

368.  Traffic  Expenses.  —  The  traffic  expenses  include  all  of  the  operat- 
ing costs  incurred  by  the  central  office  forces  in  connection  with  the  actual 
rendering  of  service.    To  this  group  of  accounts  should  be  charged  the 
salaries  of  operators,  monitors,  supervisors,  and  all  of  the  miscellaneous 
expenses  involved  in  the  maintenance  of  the  operating  forces. 

369.  Central  Office  Superintendence.  —  To  Central  Office  Super- 
intendence, Account  620,  should  be  charged  the  cost  of  central  office 
superintendence  as  provided  for  under  the  following  sub-accounts:  — 

To  Traffic  Superintendence,  Account  621,  should  be  charged  the  pay 
and  expenses  of  officers  and  their  assistants  who  are  directly  in  charge  of 
the  operating  forces.  This  account  should  also  include  the  cost  of  office 
supplies,  stationery,  light,  heat  and  miscellaneous  office  expenses,  if 
separate  offices  are  maintained  for  the  traffic  supervisory  forces. 


206        TELEPHONE  RATES  AND  VALUES 

To  Service  Inspection,  Account  622,  should  be  charged  the  pay  and 
expenses  of  inspection  forces.  In  large  plants  it  is  often  customary  to 
have  a  force  of  traffic  inspectors  who  spend  their  time  visiting  the  various 
central  offices  and  making  detailed  inspections  of  the  operating  methods. 

The  pay  of  the  clerks,  stenographers,  office  boys,  etc.,  necessary  for 
carrying  on  the  detailed  clerical  work  of  the  traffic  department  should  be 
charged  to  Account  623,  Clerical  Operating  Wages. 

In  the  case  under  discussion  it  has  been  assumed  that  the  major  portion 
of  the  traffic  supervision  will  be  carried  on  by  the  general  manager.  In 
small  plants  it  is  rarely  necessary  to  have  a  superintendent  of  traffic,  the 
chief  operators  bearing  the  burden  of  the  traffic  supervision  and  receiving 
their  instructions  directly  from  the  general  manager. 

In  Fig.  55  an  allowance  of  $500  has  been  made  to  include  the  cost  of 
central  office  superintendence,  this  amount  to  cover  both  the  time  of  the 
general  manager  spent  on  traffic  problems  and  cost  of  central  office  clerical 
work.  It  is  probable  that  the  clerical  work  would  be  done  by  a  general 
office  clerical  force  which  would  devote  only  a  portion  of  its  time  to  central 
office  work. 

370.  Operators'  Wages.  —  The  salaries  of  chief  operators,  assistant 
chief  operators,  monitors,  supervisors,  information  operators,  directory 
operators,  operators  employed  in  the  distribution  of  tickets,  operators 
engaged  in  quoting  toll  rates  and  charges,  switchboard  operators,  tele- 
graph operators,  and  all  other  forces  employed  directly  in  the  work  of 
giving  telephone  service  or  in  the  operation  of  the  central  office  equip- 
ment, should  be  charged  to  Account  624,  Operators'  Wages. 

In  Fig.  55  an  allowance  of  $10,500  has  been  made  to  cover  the  cost  of 
all  direct  operating  expenses  as  outlined. 

371.  Central  Office  Supplies  and  Expenses.  —  To  account  625 
should  be  charged  the  cost  of  all  central  office  supplies  and  expenses  as 
provided  for  in  the  following  sub-accounts :  — 

Under  account  626  record  should  be  kept  of  the  cost  of  maintaining 
the  operators'  retiring,  rest  and  lunch  rooms,  including  the  cost  to  the 
company  of  meals  served  to  the  operating  forces. 

Many  companies  provide  schools  for  training  new  operators.  All  of 
the  costs  incidental  to  the  maintenance  of  such  schools,  including  the 
wages  paid  to  the  prospective  operators  during  the  training  period,  should 
be  charged  to  account  627. 

Companies  that  do  not  maintain  special  schools  for  training  operators 
are,  nevertheless,  put  to  a  certain  expense  in  training  new  material,  and 
all  of  this  expense  should  be  charged  to  operators'  schooling,  whether  or 
not  a  separate  school  is  maintained.  The  salaries  and  expenses  of  in- 
structors engaged  in  the  training  of  new  operators  should  also  be  charged 
to  account  627. 


FUNCTION  OF  THE  APPRAISAL  IN  RATE-MAKING    207 

To  Transmission  Power,  Account  628,  should  be  charged  the  cost  of 
power  purchased  for  use  in  the  transmission  of  speech  and  in  operating 
signals.  This  includes  the  cost  of  renewing  the  local  and  central  office 
batteries,  and  the  cost  of  the  labor  and  supply  involved  in  operating 
the  power  generating  plant  and  storage  batteries. 

Account  629,  Central  Office  Stationery  and  Printing,  should  include 
the  cost  of  all  postage,  stationery,  supplies,  etc.,  used  by  the  central  office 
forces. 

To  Messenger  Service,  Account  630,  should  be  charged  the  pay  and 
expenses  of  messengers  specially  employed  for  delivering  messages  or  for 
notifying  persons  of  calls  at  telephone  stations.  The  cost  of  janitor  serv- 
ice, lighting  and  the  miscellaneous  expenses  incident  to  the  maintenance 
of  the  central  forces  should  be  charged  to  Account  631,  Miscellaneous 
Central  Office  Expenses. 

In  Fig.  55,  $500  have  been  set  aside  to  provide  for  the  numerous  items 
described  in  the  foregoing  paragraphs. 

372.  Pay   Station  Expenses.  —  Under  Account  632,   Pay  Station 
Expenses,  should  be  recorded  all  of  the  traffic  expenses,  except  commis- 
sions and  central  office  expenses,  incurred  in  connection  with  the  operation 
of  the  public  pay  stations. 

In  the  case  under  consideration  it  has  been  assumed  that  the  number 
of  public  pay  stations  would  be  limited,  and  that  no  traffic  expense  would 
be  involved  in  their  maintenance. 

373.  Other  Traffic  Expenses.  —  Account  633  provides  a  sort  of 
catchall  for  all  of  the  miscellaneous  traffic  expenses  which  cannot  be 
allocated  to  any  of  the  traffic  accounts  which  have  been  outlined.    In 
Fig.  55,  $150  have  been  allowed  for  this  miscellaneous  traffic  expense. 

374.  Commercial  Expenses.  —  The  third  group  of  operating  expenses, 
Fig.  55,  includes  all  costs  involved  in  promoting  and  advertising  the 
company's  business,  in  collecting  the  revenues,  and  in  keeping  the  com- 
pany's books.     This  group  of  accounts  is  usually  referred  to  collectively 
by  the  term,  "commercial  expenses."    Commercial  expenses  include  the 
following  accounts:  — 

Commercial  Administration,  Account  640. 
Promotion  Expenses,  Account  641. 
Collection  Expenses,  Account  645. 
Directory  Expenses,  Account  649. 
Other  Commercial  Expenses,  Account  650. 

375.  Commercial  Administration.  —  In  larger  telephone  companies 
it  is  usually  necessary  to  employ  a  commercial  manager  who  devotes  his 
entire  time  to  the  administration  of  the  commercial  department.     In 
smaller  companies,  however,  this  supervisory  work  is  often  accomplished 


208        TELEPHONE  RATES  AND  VALUES 

by  the  general  manager,  who  devotes  a  part  of  his  time  to  commercial 
administration. 

This  is  assumed  to  be  the  case  in  the  illustration  given  in  Fig.  55,  and 
an  allowance  of  $500  has  been  included  to  cover  the  cost  of  that  portion 
of  the  time  of  the  general  manager,  and  of  his  immediate  assistants, 
devoted  exclusively  to  commercial  supervisory  work. 

376.  Promotion  Expenses.  —  Under  Promotion  Expenses,  Account 
641,  should  be  included  all  of  the  costs  involved  in  advertising  and  can- 
vassing for  new  business.    Many  companies  adopt  the  practice  of  peri- 
odically employing  extra  men  to  aid  in  the  prosecution  of  an  intensive 
campaign  for  new  business. 

It  may  be  that  the  general  manager  will  find  that  he  has  ample  facilities 
to  care  for  additional  subscribers  in  a  certain  section  of  his  plant,  and  that 
he  cannot  devote  the  time  himself  to  soliciting  desirable  prospects.  In 
a  case  of  this  kind  he  will,  in  all  probability,  organize  an  intensive  cam- 
paign, employ  additional  salesmen,  and  make  a  house-to-house  canvass 
of  the  portion  of  the  plant  involved.  All  of  the  expenses  incurred  during 
such  a  campaign  would,  of  course,  be  chargeable  to  Promotion  Expenses, 
Account  641. 

In  the  case  under  consideration  it  has  been  assumed  that  the  promotion 
expenses  incurred  in  a  plant  having  only  3,000  subscribers  would  be 
relatively  small,  and  that  $200  would  cover  this  part  of  the  total  com- 
mercial expenses. 

377.  Collection   Expenses.  —  To   quote   the   Interstate   Commerce 
Commission  relative  to  Collection  Expenses,  Account  645 :  — 

Collection  expenses  should  include  the  cost  of  accounting  for  and  collecting  the 
revenues  of  the  company  as  provided  in  the  following  accounts:  — 

Revenue  Accounting,  Account  646.  —  This  account  should  include  the  cost  of 
keeping  accounts  with  subscribers  and  rendering  bills  for  revenue,  service,  includ- 
ing the  cost  of  postage,  stationery,  etc. 

Revenue  Collecting,  Account  647.  —  This  account  should  include  the  expenses  of 
the  collection  bureau,  including  postage,  stationery,  printing,  collectors'  salaries 
or  commissions,  car  fares,  etc. 

Pay  Stations  Commissions,  Account  648.  —  This  account  should  include  com- 
missions allowed  for  handling  exchange  and  toll  service  messages  from  public  pay 
stations. 

In  Fig.  55  an  allowance  of  $1,200  has  been  included  to  cover  the  collec- 
tion expenses. 

378.  Directory  Expenses.  —  To  Directory  Expenses,  Account  649, 
should  be  charged  the  cost  of  preparing,  printing  and  distributing  the 
directories.    This  account  should  also  include  the  cost  of  soliciting  adver- 
tisements for  directories. 

In  the  present  case  directory  expense  has  been  estimated  at  $600. 


FUNCTION  OF  THE  APPRAISAL  IN  RATE-MAKING    209 

379.  Other  Commercial  Expenses.  —  An  allowance  of  $100  (Other 
Commercial  Expenses,  Account  650)  has  been  included  in  Fig.  55  to  provide 
for  the  miscellaneous  items  of  commercial  expense  which  cannot  be  readily 
allocated  to  any  of  the  commercial  accounts  outlined  in  the  foregoing 
paragraphs. 

380.  General  and  Miscellaneous  Expenses.  —  The  fourth  group  of 
operating  expense  accounts,  Fig.  55,  is  designed  to  include  the  operating 
expenses  incurred  in  connection  with  the  maintenance  of  the  general 
executive  organization.    No  matter  how  small  the  company,  a  certain 
amount  of  general  expense  must  be  incurred. 

It  is  obviously  necessary  to  have  a  manager,  —  some  one  who  can 
supervise  the  work  of  those  actually  engaged  in  operating  the  plant  and 
conducting  the  business.  In  a  very  small  company  the  general  manager 
may  spend  part  of  his  time  in  the  actual  operating  work,  and  this  will  be 
charged  to  the  various  operating  accounts  already  described.  However, 
even  in  a  case  of  this  kind,  a  certain  amount  of  the  general  executive's 
time  must  necessarily  be  devoted  to  work  of  a  general  supervisory  nature, 
and  a  certain  proportion  of  his  salary  and  expenses  should  be  charged  to 
the  general  office  accounts. 

In  larger  companies  the  organization  must  necessarily  be  more  ex- 
tensive, and  probably  will  include  a  chairman  of  the  board  of  directors,  a 
president,  vice-president,  secretary,  treasurer,  comptroller,  general  auditor, 
and  possibly  other  general  executive  officers,  all  of  whom  may  draw 
salaries. 

Another  item  to  be  included  in  the  general  and  miscellaneous  expense 
accounts  is  the  cost  of  legal  advice.  Telephone  companies  frequently 
become  involved  in  damage  suits,  or  it  may  be  that  legal  advice  is  neces- 
sary as  an  adjunct  to  the  presentation  of  a  company's  rate  case  before  a 
public  utility  commission. 

All  of  the  expenses  incurred  by  the  legal  department,  or,  if  the  com- 
pany does  not  maintain  its  own  legal  department,  all  of  the  retainers  paid 
for  the  services  of  attorneys  who  are  not  regular  company  employees, 
should  be  charged  to  the  general  and  miscellaneous  expense  accounts. 

Insurance  is  another  item  included  with  this  fourth  group  of  operating 
expense  accounts.  To  the  insurance  account  should  be  charged  all 
premiums  to  insurance  companies  for  fire,  fidelity,  casualty,  burglar  and 
all  other  forms  of  insurance. 

Fig.  56  presents  a  diagram  showing  the  correlation  of  the  various  general 
and  miscellaneous  expense  accounts.  It  is  thought  that  this  diagram, 
together  with  general  discussion  given  in  the  foregoing  paragraphs,  will 
enable  the  reader  to  grasp  the  significance  of  the  general  and  miscellaneous 
expense  accounts,  and  that  it  will  not  be  necessary  to  give  a  detailed 
description  of  each  of  these  accounts  and  sub-accounts. 


210 


TELEPHONE  RATES  AND  VALUES 


In  Fig.  55  $2,500  have  been  assigned  to  "General  Office  Salaries"  and 
$900  to  "  General  Office  Supplies  and  Expenses."  It  will  be  remembered 
that  a  proportion  of  the  salaries  and  expenses  of  the  general  staff  has 
already  been  assigned  to  the  maintenance,  traffic  and  commercial  groups. 

The  amount  just  quoted,  therefore,  represents  the  proposition  of  the 
general  office  salary  and  expense  items  which  cannot  be  allocated  to  the 


General  and 

Miscellaneous 

Expenses. 


General  office 
account  660. 


Salaries  of  general  officers,  /  President,  vice-president, 
account  661.  \      secretary,  treasurer,  etc. 

Salaries   of    general    office  f  Bookkeepers,  paymasters, 
clerks,  account  662.  \      cashiers,  stenographers, 

[      etc. 

General  office  supplies  f  Expenses  of  general  officers  and  clerks,  account  664. 
and  expenses,  ac-  <  General  office  stationery  and  printing,  account  665. 
count  663.  [  Other  general  office  supplies  and  expenses,  account  666. 

General  law  expense,  f  All  law  expenses  except  those  incurred  in  the  defence 
account  667.  \  and  settlement  of  damage  claims. 


Insurance,  account  668. 


Accidents    and    dam- 
ages, account  669. 


Miscellaneous     general 
expenses,  account  671. 


Premiums  paid  for  fire,  fidelity,  casualty  and  all  other 
insurance. 

Salaries  and  expenses  of  claim  agents,  investigators  and 
adjusters. 

Fees  and  expenses  of  surgeons  and  doctors. 

Hospital  expenses  of  injured  claimants. 

Amounts  paid  in  settlement  of  personal  injury  or  dam- 
age claims. 

All  expenses  connected  (  All  legal  expenses  incurred  in  the  defence  or  settlement 
with    damages,    ac-  I      of  damage  claims. 
count  670. 

f  Pensions  or  other  benefits 

Relief     department     and  I       paid  to  employees  and 
pensions,  account  672.        ]      all     expenses    involved 
L      therein. 

Cost  of  all  service  and  ma- 
terials furnished  to  mu- 
nicipal corporations  in 
compliance  with  fran- 
chise requirements  and 
for  which  no  payment  is 
received  by  the  com- 
pany. Many  companies 
are  required  by  fran- 
chise to  furnish  to  the 
city  a  certain  number 
of  telephones  without 
charge. 

|  Other  general  expenses,  /  Incidental  general  expenses  which  cannot  be  allocated 
[      account  675.  \      to  any  of  the  foregoing  expense  accounts. 

FIG.  56.  — General  and  miscellaneous  expenses. 


Telephone     franchise     re- 
quirements, account  673. 


primary  operating  account  and  hence  must  be  charged  to   "General 
Expenses." 

In  the  case  illustrated,  in  Fig.  55,  the  general,  legal,  accident  and  damage 
and  "legal  expense  connected  with  damages"  accounts  have  all  been 
assumed  to  be  low,  —  $100,  $100  and  $50,  respectively.  Most  companies 
of  the  size  of  the  one  under  consideration  are  not  put  to  heavy  expenses 
for  legal  talent.  It  is  in  the  larger  cities  that  their  items  become  a  really 
important  one. 


FUNCTION  OF  THE  APPRAISAL  IN  RATE-MAKING    211 

Insurance  has  been  taken  at  $600,  and  the  miscellaneous  general  expenses 
at  $1,000. 

A  survey  of  the  various  sources  of  operating  revenue  and  the  various 
causes  of  operating  expense  has  now  been  presented.  In  the  following 
sections  the  various  " non-operating"  revenues  and  expenses  and  the 
deductions  from  net  operating  revenues  will  be  discussed. 

381.  Non-operating  Revenues.  —  To  simplify  our  illustration  it  has 
been  assumed  that  there  will  be  no  "non-operating"  revenues.    This  item 
however,  frequently  plays  quite  an  important  part  in  the  rate   problems 
of  the  larger  companies,  and  it  may  be  well  to  briefly  consider  its  general 
characteristics. 

Many  telephone  companies  owning  their  own  buildings  follow  the 
practice  of  renting  the  space  not  required  for  telephone  purposes  to  outside 
concerns.  In  single-office  exchanges  the  telephone  building  is  usually 
located  in  the  heart  of  the  commercial  district,  and  the  revenue  resulting 
from  the  rental  of  office  and  store  space  may  be  appreciable.  In  multi- 
office  exchanges,  at  least  one  of  the  offices  is  certain  to  be  located  in  the 
commercial  district,  so  that  unused  floor  space  may  be  rented  for  offices 
and  stores. 

It  sometimes  happens  that  a  telephone  company  will  rent  a  pole  line, 
or  a  cable,  for  the  exclusive  use  of  some  outside  concern.  The  revenue 
accruing  from  such  a  source  would  be  classified  as  "non-operating  revenue." 

Another  source  of  non-operating  revenue  may  be  found  in  dividends 
declared  on  stock  of  other  corporations  owned  by  the  company. 

The  various  sources  of  non-operating  revenue  are  represented  diagram- 
matically  in  Fig.  57.  It  will  be  noted  that  the  account  numbers  are  given 
in  parentheses  after  each  of  the  non-operating  revenue  accounts.  A  study 
of  this  table,  together  with  the  foregoing  remarks,  should  be  sufficient 
to  give  the  reader  a  very  good  idea  of  just  what  sources  of  income  should 
be  classified  under  the  heading  "Non-operating  Revenues." 

382.  Non-operating  Expenses.  —  In  the  previous  sections  the  various 
sources  of  non-operating  revenue  have  been  discussed.    All  the  expenses 
which  are  incurred  in  connection  with  the  non-operating  revenues  are 
grouped  together  under  the  headings,   "Non-operating  Expenses,"  or 
"Non-operating  Revenue  Deductions,"  as  they  are  sometimes  called. 

Under  the  non-operating  revenues,  as  an  illustration,  accounts  310  and 
311  cover  revenues  accfuing  from  the  lease  of  property  to  outside  concerns. 
Frequently  in  making  such  leases  it  becomes  necessary  to  make  certain 
expenditures  to  maintain  the  leased  property  in  suitable  condition  for  the 
lessees.  All  such  expenses  should  be  charged  to  Rent  Expenses,  Account 
320,  this  account  including  all  expenses  incurred  in  connection  with 
rented  property,  such  as  cost  of  maintenance,  cost  of  negotiating  con- 
tracts, Conveyance  fees,  collectors'  commissions,  etc. 


212 


TELEPHONE  RATES  AND  VALUES 


Non- 
operating 
revenues 


Rent  revenues 

from  lease  of 

telephone  plant 

(310) 


Miscellaneous 

rent  revenues 

(311) 


This  account  should  include  all  revenues  from  the  company's  in- 
terests in  telephone  plant  or  equipment  held  by  others  under 
some  form  of  lease  whereby  it  surrenders  possession  of  such 
property  for  operating  purposes. 

This  account  is  intended  to  cover  only  rents  receivable  for  the 
use  of  telephone  exchanges  or  operating  units  held  as  a  whole  by 
others  under  some  form  of  lease. 

This  account  should  include  the  revenues  accruing  to  the  company 
as  a  return  upon  rented  property  other  than  telephone  plant 
and  equipment,  held  by  others  under  lease,  as  provided  for  in 
the  preceding  account. 

Note.  —  If  the  property  rented  is  so  intimately  connected  with 
property  used  in  the  company's  telephone  operations  that  the 
expenses  on  the  former  cannot  be  ascertained,  the  revenues 
should  be  credited  to  Account  505,  Minor  Rents  of  Exchange 
Plant,  Account  515,  Minor  Rents  of  Toll  Plant,  or  Account  524, 
Rents  from  Other  Operating  Property,  as  may  be  appropriate, 
and  the  expenses  in  connection  with  the  rented  property  should 
be  included  in  the  operating  expenses. 

This  account  should  include  dividends  declared  on  stocks  owned 
by  the  accounting  company  (and  held  in  its  treasury  or  deposited 
in  trust),  or  controlled  through  lease  or  otherwise,  the  income 
from  which  is  the  property  of  the  accounting  company.  Accru- 
als of  guaranteed  dividends  may  be  included  in  this  account  if 
their  payment  is  reasonably  assured. 

Dividend  reve-     I    Note  A.  —  This  account  should  not  include  credits  for  dividends 
nues  (312)  on  stocks  issued  or  assumed  by  the  accounting  company  and 

owned  by  it,  whether  held  in  its  treasury,  in  special  deposits,  or 
in  sinking  or  other  reserve  funds,  or  pledged  as  collateral. 

Note  B.  —  Dividends  on  stocks  of  other  companies  held  in  sinking 
or  other  reserve  funds  should  not  be  included  in  this  account, 
but  should  be  credited  to  Account  314,  Sinking  and  Other  Re- 
serve Fund  Accretions. 

This  account  should  include  interest  on  funded  securities  of  other 
companies  owned  by  the  accounting  company  (and  held  in  its 
treasury  or  deposited  in  trust),  or  controlled  through  lease  or 
otherwise,  the  income  from  which  is  the  property  of  the  account- 
ing company;  interest  on  notes,  bank  balances  and  open  ac- 
counts; and  other  analogous  items,  including  discount  on  short- 
term  notes.  Interest  accrued  should  not  be  credited  unless  its 
payment  is  reasonably  assured  by  past  experience,  guaranty, 
anticipated  provision  or  otherwise.  In  other  cases  the  credit  to 
this  account  should  be  based  upon  the  interest  actually  collected. 

Note  A .  —  This  account  should  not  include  interest  on  funded 
securities  issued  or  assumed  by  the  accounting  company  and 
owned  by  it,  whether  held  in  its  treasury,  or  in  sinking  or  other 
reserve  funds,  or  pledged  as  collateral. 

Note  B.  —  Interest  on  funded  securities  of  other  companies  held 
in  sinking  or  other  reserve  funds  should  not  be  included  in  this 
account,  but  in  Account  314,  Sinking  and  Other  Reserve  Fund 
Accretions. 

Note  C.  —  At  the  option  of  the  company  there  may  be  included  in 
this  account  the  portion  applicable  to  the  fiscal  period  of  the 
amount  requisite  to  extinguish  (during  the  interval  between  the 
date  of  acquisition  and  the  date  of  maturity)  the  discount  or 
i       premium  on  funded  securities  of  other  companies  owned. 

This  account  should  include  the  revenues  accruing  on  cash,  securi- 
ties and  other  assets  (other  than  securities  issued  or  assumed  by 
the  accounting  company)  in  the  hands  of  the  trustees  or  specifi- 
cally set  aside  for  sinking  and  other  special  funds. 

Note  A  .  —  At  the  option  of  the  company  there  may  be  included  in 
this  account  the  portion  applicable  to  the  fiscal  period  of  the 

Sinking  fund  amount  requisite  to  extinguish  (during  the  interval  between  the 

and  other  date  of  acquisition  and  the  date  of  maturity)  the  discount  or 

reserve  fund       •        premium  on  funded  securities  of  other  companies  held  in  sink- 
accretions  ing  or  other  reserve  funds. 

(314)  Note  B.  —  If  the  income  on  any  special  fund  is  retained  in  the 

fund,  and  if  the  fund  is  required  to  be  represented  by  a  reserve, 
the  amounts  credited  to  this  account  in  respect  to  such  income 
should  be  concurrently  charged  to  Account  350,  Appropriations 
of  Income  to  Sinking  and  Other  Reserve  Funds,  and  credited  to 
Account  172,  Surplus  Invested  in  Sinking  Funds,  or  other  ap- 
propriate reserve  account. 

Whenever,  in  accordance  with  the  terms  of  any  contract,  the  com- 
pany is  entitled  to  participate  in  the  profits  from  operations  of 
Profit  from  others,  all  revenues  accruing  to  the  company  from  such  source 

operations  of  should  be  credited  to  this  account. 

others  (315)  Note.  —  This  account  does  not  include  any  dividends  or  other 

returns  upon  securities  issued  by  such  separately  operating 
companies,  nor  any  remunerations  for  services  or  the  use  of 
property  as  provided  for  in  Account  526,  Licensee  Revenue,  Cr. 

Miscellaneous  operating  /  This  account  should  include  all  non-operating  revenues  not 
revenues  (316)  {       provided  for  in  the  foregoing  accounts. 

FIG.  57.  — Non-operating  revenue  accounts  as  prescribed  by  the  Interstate  Commerce  Commission. 


Interest  reve- 
nues (313) 


FUNCTION  OF  THE  APPRAISAL  IN  RATE-MAKING    213 

Taxes  paid  upon  non-operating  property  and  all  taxes  assignable  to 
non-operating  revenues  should  be  included  in  this  general  grouping  of 
accounts. 

Fig.  58  shows  the  correlation  and  general  characteristics  of  the  non- 
operating  expense  account. 

This  account  should  include  all  expenses  in  connection  with 
rented  property,  the  rents  of  which  are  included  in  Accounts 
310  or  311,  such  as  the  cost  of  maintenance  when  borne  by  the 
company,  the  cost  of  negotiating  contracts,  advertising  for 
tenants,  fees  paid  conveyancers,  collectors'  commissions,  cost 
of  enforcing  payment  of  rent,  cost  of  ousting  tenants,  etc.  This 
includes  the  expenses  accruing  while  the  property  is  idle  and 
awaiting  an  occupant.  It  does  not  include  taxes. 

Note.  —  If  the  property  rented  is  so  intimately  connected  with 
property  used  in  the  company's  telephone  operations  that  the 
expenses  on  the  former  cannot  be  ascertained,  they  should  be 
included  in  the  operating  expenses,  and  the  revenue  should  be 
credited  to  Account  505,  Minor  Rents  of  Exchange  Plant,  Ac- 
count 515,  Minor  Rents  of  Toll  Plant,  or  Account  524,  Rents 
from  Other  Operating  Property,  as  may  be  appropriate. 

This  account  should  include  all  expenses  in  connection  with  non- 
operating  revenue  other  than  the  expense  provided  for  in  Ac- 
count 320,  "Rent  Expense."  This  account  should  include  all 
expenses  in  connection  with  procuring  interest  revenue,  divi- 
dend revenue,  profits  from  operations  of  others  and  analogous 
items.  It  does  not  include  the  taxes  on  such  investments. 

This  account  should  include  all  taxes  payable  by  the  company 
accruing  upon  non-operating  property  and  all  taxes  assignable 
to  non-operating  revenues. 

When  any  non-operating  revenues  are  judged  by  the  company  to 
be  uncollectible,  the  amount  thereof  should  be  credited  to  the 
account  in  which  theretofore  charged  and  charged  to  this 
account. 

FIG.  58.  —  Non-operating  expenses. 


Rent  expense 

(320) 

i 

Non- 
operating 
expenses 

Miscellaneous 
expense  (321) 

Non-operating     I 
taxes  (322)      j 

Uncollectible 
non-operating     \ 
revenues  (323) 

383.  Deductions  from  Net  Telephone  Operating  Revenue.  —  In 

discussing  the  various  sources  of  non-operating  revenue  and  expenses  we 
have  strayed  a  long  way  from  our  original  illustration,  —  that  of  a  tele- 
phone company  having  3,000  subscribers  in  a  town  of  about  10,000  popula- 
tion. Fig.  59  presents  an  analysis  of  the  net  income  of  the  company  cited 
in  the  illustration. 

The  items  of  operating  revenues  and  operating  expenses  are  taken, 
respectively,  from  Figs.  54  and  55,  which  have  already  been  discussed. 
The  total  telephone  operating  revenue  amounts  to  $55,850,  and  the  total 
operating  expenses  amount  to  $51, 150.  This  leaves  a  net  telephone  operat- 
ing revenue  of  $4,700. 

Inasmuch  as  it  has  been  assumed  that  there  are  no  non-operating 
revenues  or  expenses,  we  may  proceed  directly  to  the  "Deductions  from 
Net  Telephone  Operating  Revenue."  These  deductions,  in  the  case  under 
consideration,  consist  of  taxes  on  operating  telephone  plant  and  uncol- 
lectible operating  revenues.  The  taxes  have  been  assumed  at  $1,400 
and  the  uncollectible  revenues  at  $400,  making  a  total  deduction  of  $1,800, 
which  leaves  an  " Operating  Income"  of  $2,900. 


214        TELEPHONE  RATES  AND  VALUES 

Operating  revenue :  — 

Exchange  service  revenue,       ......  $50,600 

Toll  service  revenue,       .          .                    .                    .          .  5,000 

Miscellaneous  operating  revenue,     .....  250 


Total  operating  revenue,      ........      $55,850 

Operating  expenses:  — 

Maintenance  expenses,   .......  $31,650 

Traffic  expenses, .          .  11,650 

Commercial  expenses,     .......  2,600 

General  miscellaneous  expenses,        .          .                               .  5,250 


Total  operating  expenses,     .  .... 

Net  telephone  operating  revenue,  .          .          ..... 

Deductions  from  net  telephone  operating  revenue :  — 

Taxes,  .  $1,400 

Uncollectible  accounts,   .  ....  400 


Total, 1,800 


Operating  income,        .........        $2,900 

Deductions  from  operating  income :  — 

Rentals, 

Interest  deductions  on  funded  debt,  .          .          .          $5,000 


Total  deductions  from  operating  income,  .....          5,000 


Net  income  (loss),       .  .        $2,100 

FTG.  59.  —  Net  income. 

384.  Deductions  from  Operating  Income.  —  To  obtain  the  net 
income  still  further  deductions  must  be  made.    These  are  usually  known  as 
"  Deductions  from  Operating  Income."    In  this  case  they  consist  only 
of  interest  on  the  funded  debt,  amounting  to  $5,000.    The  interest  on  the 
funded  debt  is,  of  course,  the  interest  accruing  against  the  outstanding 
bond  issues. 

It  will  be  noted  that  the  interest  on  the  funded  debt  ($5,000)  exceeds 
the  operating  income  ($2,900)  by  $2,100.  In  other  words,  the  company 
is  operating  at  a  net  loss  of  $2,100  a  year. 

385.  Analysis  of  Expense  Items.  —  The  next  problem  is  to  analyze 
the  various  expense  items  with  a  view  to  determining  whether  or  not  any 
of  them  are  excessive.     Referring  again  to  Fig.  59,  it  will  be  noted  that 
the  operating  expenses  consist  of  the  following:  — 


FUNCTION  OF  THE  APPRAISAL  IN  RATE-MAKING    215 

Maintenance  expenses,        .          .  •  $31,650 

Traffic  expenses,         .  •  11,650 

Commercial  expenses,         .  2,600 

General  and  miscellaneous  expenses, 5,250 


Total  operating  expenses,         .  .      $51,150 

The  best  way  to  analyze  these  operating  expenses  is  on  a  cost  per 
station  basis.  As  there  are  3,000  subscribers,  the  totals  stated,  divided 
by  3,000,  give  the  corresponding  costs  per  station.  These  are  as  follows:  — 

Maintenance  expenses, 

Traffic  expenses, 

Commercial  expenses,  .          .          . 

General  miscellaneous  expenses,    . 

Total  operating  expenses,       .  .     $17  05 

By  comparing  these  costs  per  station  with  similar  figures  for  other  prop- 
erties of  about  the  same  size  and  type  we  can  readily  ascertain  their 
reasonableness.  As  a  matter  of  fact,  they  are  all  conservative,  and  the 
company  whose  rates  we  are  investigating  is  evidently  well  managed  from 
an  operating  standpoint. 

In  this  connection  it  should  be  remembered  that  depreciation  has 
already  been  included,  in  Fig.  60,  as  a  part  of  the  maintenance  expenses. 
Depreciation  in  this  particular  case  was  taken  at  7£  per  cent  on  the  repro- 
duction cost  of  the  physical  property  ($262,000),  as  given  in  Fig.  52. 

Obviously  the  "Deductions  from  Net  Telephone  Operating  Revenue" 
—  taxes  $1,400  and  uncollectible  $400  —  are  reasonable  for  a  plant  of  the 
size  of  the  one  under  consideration.  The  taxes  amount  to  only  one-half 
of  1  per  cent  of  the  reproduction  cost  of  the  physical  property,  and  the 
allowance  for  uncollectible  accounts  is  less  than  three-quarters  of  1  per 
cent  of  the  total  operating  revenue  ($55,850). 

In  Fig.  59,  it  will  be  noted  that  no  allowance  has  been  made  for  rentals. 
This  is  due  to  the  fact  that  in  our  hypothesis  we  have  assumed  that  the 
company  owns  its  own  building,  and  an  allowance  of  $25,000,  representing 
the  reproduction  cost  of  the  building,  was  included  in  Fig.  52. 

The  interest  on  the  funded  debt  amounts  to  $5,000.  If  the  interest  rate 
is  assumed  to  be  6  per  cent,  the  funded  debt  would  amount  to  slightly  less 
than  $84.000,  and,  as  the  reproduction  cost  of  the  physical  property  has 
been  found  at  $262,000,  the  property  is  bonded  only  at  32  per  cent  of  its 
valuation. 

386.  Analysis  of  the  Property  Valuation.  —  As  it  is  obvious  from  the 
analysis  just  made  that  all  of  the  expense  items  are  entirely  within  reason, 
we  must  look  further  to  find  why  the  company  is  operating  at  a  loss.  In 


216 


TELEPHONE  RATES  AND  VALUES 


most  rate  analyses,  having  determined  the  reasonableness  of  the  expenses, 
the  next  step  would  involve  an  analysis  of  the  valuation  of  the  property. 
In  this  case  the  total  value  of  the  plant  and  business  was  found  to  be  $350-, 
000,  as  given  in  Fig.  53. 

Inasmuch  as  our  assumption  presupposes  that  all  of  the  costs  in  this 
table  have  been  determined  from  a  careful  engineering  inventory  and 
appraisement  of  the  property,  they  may  be  accepted  as  representing  a 
fair  value,  on  a  reproduction  basis,  of  the  plant  and  business.  However, 
if  the  reader  so  desires  he  may  test  their  reasonableness  by  reducing  the 
various  major  items  to  a  cost  per  station  basis.  In  Fig.  60  both  the  total 
reproduction  cost  and  the  reproduction  cost  per  station  are  shown  for  the 
various  major  items  of  cost  as  taken  from  Figs.  52  and  53. 


Total 
Reproduc- 
tion Cost. 

Reproduc- 
tion Cost 
per 
Station. 

Total  direct  construction  cost,         $226,000 
Total  collateral  construction  cost,    36,000 

$262,000 
88,500 

$75  33 
12  00 

Total  cost  of  physical  property,        

Total  allowances  for  franchises,  going  value,  cost  of  financing  and  work- 
ing capital  

Total  cost  of  plant  and  business  as  of  appraisement  date, 

$87  33 
29  50 

$350,500 

$116  93 

FIG.  60.  —  Analysis  of  Property  Values. 

The  comparison  of  these  cost-per-station  figures  with  those  of  other 
companies  having  a  similar  plant  and  business  will  show  that  they  are 
conservative. 

387.  Conclusions  from  Analysis.  —  Obviously,  if  the  expenses  and 
the  valuation  of  the  property  are  reasonable,  the  loss  in  net  income  must  be 
attributed  to  the  fact  that  the  rates  in  effect,  as  of  the  appraisal  date,  are 
far  too  low.    An  analysis  of  the  existing  rates  and  a  determination  of  rates 
adequate  to  insure  a  fair  return  on  the  valuation  of  $350,000  will  be  dis- 
cussed in  the  ensuing  sections. 

388.  Final  Determination  of  Insufficient  Revenues.  —  In  the 
discussion  of  Fig.  53  it  will  be  remembered  the  item  "Toll  Service  Reve- 
nue" was  assumed  to  be  that  revenue  accruing  from  toll  calls  originating 
within  the  company's  exchange.    This  assumption  was  predicated  upon 
the  hypothesis  that  all  of  the  toll  service  is  furnished  by  a  separate  toll 
company.    Therefore  the  toll  revenue  of  the  company  under  consideration 
is  only  that  resulting  from  the  commissions  on  originating  toll  calls.    To 
simplify  our  analysis  we  may,  therefore,  assume  that  the  toll  service 


FUNCTION  OF  THE  APPRAISAL  IN  RATE-MAKING    217 


revenue  of  $5,000  and  the  miscellaneous  operating  revenue  of  $250  are  both 
reasonable. 

The  source  of  trouble,  then,  is  in  the  exchange  service  revenue.  In 
other  words,  the  rates  for  exchange  service  as  existent  at  the  date  of  the 
investigation  are  very  much  too  low. 


CLASS  OF  SERVICE. 

Number  of 
Stations. 

Annual 
Rate. 

Revenue. 

Business,  one-party  

600 

$21 

$12,600 

Business,  extension,   

50 

6 

300 

Residence,  one-party, 

728 

18 

13,104 

Residence,  two-party, 

1,591 

15 

23,865 

Residence,  extension, 

30 

3 

90 

Private  lines, 

1 

41 

41 

Extra  mileage  and  extra  listing 

600 

Totals,          .         .         

3,000 

- 

$50,600 

FIG.  61.  —  Present  exchange  service  revenue. 

389.  Analysis   of  Exchange   Service   Revenues. —  In  Fig.  61  an 
analysis  is  presented  of  the  exchange  service  revenue,  $50,600. 

It  will  be  noted  that  there  is  only  one  class  of  business  service,  —  one 
party,  —  and  that  the  rate  for  this  service  is  $21  a  year.  There  are  two 
classes  of  residence  service,  —  single-party  at  $18  a  year,  and  two-party 
at  $15  a  year.  Extension  stations  are  charged  for  at  the  rate  of  $6  or  $3 
for  business  and  residence  extension  service,  respectively.  There  is  one 
private  line  for  which  a  charge  of  $41  a  year  is  made,  and  a  miscellaneous 
revenue  of  $600  accruing  from  extra  listings  and  extra  mileage  charges. 

By  comparison  with  the  classifications  of  service  in  other  companies 
of  a  similar  size  and  character,  it  is  obvious  that  the  service  classification 
of  the  company  whose  rates  we  are  investigating  is  inadequate.  A  com- 
pany with  3,000  local  telephone  subscribers  should  provide  two  classes  of 
business  service,  —  single-party  and  two-party;  and  three  classes  of 
residence  service,  —  single-party,  a  two-party  and  four-party. 

By  a  similar  method  of  comparative  reasoning  we  would  find  that  the 
rates  charged  for  these  various  classes  of  service  are  too  low,  even  if  we 
did  not  know  that  the  company  is  losing  money. 

390.  The  Steps  for  creating  Sufficient  Revenues.  —  The  solution 
of  our  problem  has  now  narrowed  down  to  three  moves :  — 

I.  To  determine  a  fair  rate  of  return  on  the  valuation  of  $350,500. 

II.  To  apply  this  rate  of  return  to  the  valuation  and  thus  determine 
a  fair  net  income. 

III.  To  provide  a  classification  of  service,  and  a  schedule  of  rates  there- 
for, that  will  be  adequate  to  provide  the  net  income  as  determined  under  II. 

391.  Determination  of  Rate  of  Return.  —  The  determination  of 
the  rate  of  return  that  a  telephone  company  may  be  allowed  to  realize  on 


218        TELEPHONE  RATES  AND  VALUES 

its  investment  in  plant  and  business  is  at  best  a  difficult  problem.  Usually 
the  solution  is  largely  dependent  upon  the  attitude  of  the  utility  com- 
mission under  whose  jurisdiction  the  company  operates.  Obviously, 
people  who  invest  their  money  in  a  telephone  business  —  or,  for  that 
matter,  in  any  utility  or  industrial  business  —  must  be  assured  of  a 
higher  rate  of  return  than  people  who  invest  their  money  in  safer  securities, 
such  as  real  estate  first  mortgages  and  the  bonds  of  utility  and  industrial 
companies. 

In  many  States  real  estate  first  mortgages  net  the  investor  6  per  cent, 
and  there  are  many  dependable  utility  and  industrial  bonds  that  afford 
an  equally  generous  return.  Bearing  this  fact  in  mind,  we  may  be  justified, 
for  the  purpose  of  our  illustration,  in  assuming  that  8  per  cent  is  a  fair 
return  on  an  investment  in  a  well-organized  and  conservatively  operated 
telephone  business.  Eight  per  cent  of  $350,500  is  $28,040  a  year. 

392.  Analysis  of  Assumed  Revenues.  —  Fig.  62  presents  an  analysis 
of  assumed  revenues  and  expenses  adequate  to  produce  a  net  income  of 

Operating  revenue:  — 

Exchange  service  revenue,       ......  $80,740 

Toll  service  revenue, 5,000 

Miscellaneous  operating  revenue,     .....  250 


Total  operating  revenue $85,990 

Operating  expenses:  — 

Maintenance  expenses,   ...                                         .  $31,650 

Traffic  expenses, 11,650 

Commercial  expenses,     ....                    .  2,600 

General  miscellaneous  expenses,        .....  5,250 


Total  operating  expenses,     .          .  .          .          .          .          .        51,150 


Net  telephone  operating  revenue,  ......      $34,840 

Deductions  from  net  telephone  operating  revenue :  — 

Taxes,  .          .          .  $1,400 

Uncollectible  accounts,  .......  400 

Total,  1,800 


Operating  income,       .......  .      $33,040 

Deductions  from  operating  income :  — 
Rentals,  ..... 
Interest  deductions  on  funded  debt,  ....  $5,000 


Total  deductions  from  operating  income 5,000 


Net  income,        .  .  •      $28,040 

FIG.  62.  —  Analysis  of  net  income  necessary  to  produce  8  per  cent  return  on  investment. 


FUNCTION  OF  THE  APPRAISAL  IN  RATE-MAKING    219 


$28,040  a  year.  Inasmuch  as  all  of  the  items  under  the  terms  of  our 
hypothesis  remain  the  same,  except  exchange  service  revenue,  it  is  only 
necessary  to  add  the  exchange  revenue  plus  deficit  ($52,700)  to  the  desired 
net  income  ($28,040)  and  substitute  this  figure  ($80,740),  in  Fig.  59,  and 
make  the  corresponding  changes  in  the  totals  as  shown  in  Fig.  62. 

In  Fig.  63  is  presented  an  analysis  of  the  proposed  classification  of 
service  and  of  the  revised  schedule  of  rates.  It  will  be  noted  that  two 
classifications  of  business  service  have  been  provided,  —  single-party 


CLASS  OF  SERVICE. 

Number  of 
Stations. 

Annual 
Rate. 

Revenues. 

Business,  one-party,  

400 

$36 

$14,400 

Business,  two-party,           

200 

30 

6,000 

Business,  extension,  .         .         . 

50 

6 

300 

Residence,  one-party,         

500 

24 

12,000 

Residence,  two-party,        

819 

21 

17,199 

Residence,  four-party  

1,000 

18 

18,000 

Residence,  extension,         

30 

6 

180 

Private  lines,      

1 

48 

48 

Extension  mileage,  extension  listing,  etc., 

- 

- 

600 

Total  

3,000 

- 

$68,127 

FIG.  63.  —  Proposed  exchange  service  revenue  —  subscriber  stations  unchanged. 

and  two-party;  and  three  classifications  of  residence  service,  —  single- 
party,  tworparty  and  four-party.  The  total  number  of  subscribers  as 
given  in  Fig.  63  is  the  number  existing  at  the  date  of  appraisal,  3,000. 

393.  Changes  in  Subscriber  Classifications.  —  It  has  been  assumed 
that  of  the  600  single-party  business  subscribers  as  given  in  Fig.  61,  400 
under  the  new  schedule  of  rates  will  be  subscribers  to  single-party  service, 
and  200  to  two-party  business  service.  In  establishing  a  new  classification 
of  service,  especially  when  it  is  accompanied  by  a  raise  in  rates,  there  is 
always  a  tendency  for  subscribers  to  gravitate  toward  the  classifications 
of  service  having  the  lower  rates. 

In  the  case  of  the  business  service,  however,  we  are  probably  warranted 
in  the  assumption  that  two-thirds  of  the  total  number  will  retain  single- 
party  service,  and  that  the  remaining  third  will  take  service  at  the  cheaper 
rate.  In  the  case  of  the  residence  service,  however,  it  is  probable  that  a 
greater  proportion  of  the  total  number  of  residence  subscribers  will  take 
the  cheaper  classes  of  service. 

In  Fig.  61  there  were  728  single-party  residence  subscribers  and  1,591 
two-party  residence  subscribers.  In  Fig.  63  the  number  of  single-party 


220 


TELEPHONE  RATES  AND  VALUES 


subscribers  has  been  reduced  to  500,  the  number  of  two-party  residence 
subscribers  estimated  at  819,  and  the  number  of  four-party  at  1,000, 
making  a  total  of  1,819  party  line  subscribers  in  Fig.  63  as  against  1,591 
in  Fig.  61.  The  number  of  extension  stations,  both  business  and  residence, 
has  been  assumed  to  be  identical  in  both  Fig.  61  and  Fig.  63. 

394.  Comparison  of  Rates.  —  The  single-party  business  rate,  it  will 
be  noted,  has  been  raised  from  $21  to  $36,  and  a  two-party  business  rate 
has  been  established  at  $30.  The  single-party  residence  rate  has  been  raised 
from  $18  to  $24,  and  the  two-party  residence  rate  from  $15  to  $21.  A 
four-party  residence  rate  has  been  provided  in  Fig.  63  at  $18,  this  being  the 
same  as  the  single-party  residence  rate  in  Fig.  61. 

The  rate  for  business  extension  stations  has  been  taken  at  $6,  as  in  Fig. 
61,  and  the  rate  for  residence  extension  stations  has  been  raised  from  $3  to 


CLASS  OF  SERVICE. 

Number  of 
Stations. 

Annual 
Rate. 

Revenues. 

Business,  one-party,  

480 

$36 

$17,280 

Business,  two-party,           

230 

30 

6,900 

Business,  extension,  

50 

6 

300 

Residence,  one-party  

590 

24 

14,160 

Residence,  two-party,        

919 

21 

19,299 

1,200 

18 

21,600 

Residence,  extension,         

30 

6 

180 

Private  line,       

1 

48 

48 

Extension  mileage,  extension  listing,  etc., 

- 

- 

973 

Total,  

3,500 

- 

$80,740 

FIG.  64.  —  Proposed  exchange  service  revenue  —  500  new  subscribers. 

$6.  This  latter  increase  has  been  due  to  the  fact  that  there  is  no  appre- 
ciable difference  in  the  cost  of  supplying  residence  and  business  extension 
service,  and  therefore  no  reason  for  a  difference  in  the  rate.  The  allowance 
for  "extras"  has  been  taken  at  $600  in  Fig.  63  as  in  Fig.  61. 

It  will  be  noted  that  this  reclassification  of  service  and  raise  in  the  rates 
result  in  an  exchange  service  revenue  of  only  $68,127,  while  a  revenue  of 
$80,740  is  necessary  to  produce  the  net  income  stipulated  in  Fig.  62. 

It  has  been  assumed,  however,  that  the  plant  under  consideration  is  not 
working  up  to  its  full  capacity,  and  that  the  plant  manager  has  estimated 
that  he  can  secure  500  additional  subscribers  through  an  active  canvass, 
and,  furthermore,  that  he  can  properly  care  for  these  subscribers  without 
increasing  the  telephone  facilities.  It  has  also  been  assumed  that  this  500 


FUNCTION  OF  THE  APPRAISAL  IN  RATE-MAKING    221 

net  increase  will  be  distributed  over  the  various  service  classifications  about 
as  follows :  — 

80  single-party  business  subscribers. 

30  two-party  business  subscribers. 

90  single-party  residence  subscribers. 
100  two-party  residence  subscribers. 
200  four-party  residence  subscribers. 

In  other  words,  the  net  increase  will  assume  the  same  relative  pro- 
portions as  those  presented  in  Fig.  63.  In  Fig.  64  a  new  estimate  of  ex- 
change service  revenue  is  presented  with  allowance  for  the  estimated  in- 
crease in  business,  —  500  subscribers.  An  addition  of  $373  has  been 
arbitrarily  made  to  the  allowance  for  "extras."  With  this  addition  the 
total  exchange  service  revenue  amounts  to  $80,740,  —  the  figure  given  in 
Fig.  62,  —  while  the  total  number  of  subscribers  is  increased  to  3,500. 

395.  Conclusion.  —  This  concludes  the  analysis  of  the  hypothetical 
rate  problem.  By  assumption  we  have  appraised  the  plant  and  business; 
subsequently  proved  this  valuation  on  a  cost-per-station  basis;  analyzed 
the  expenses  and  subsequently  proved  their  reasonableness  on  a  cost- 
per-station  basis;  analyzed  the  revenues,  other  than  exchange  service 
revenues,  and  found  them  to  be  within  reason;  assumed  a  classification 
and  a  schedule  of  rates  necessary  to  produce  the  exchange  service  revenue 
existent  at  the  date  of  the  appraisal,  —  and  found  both  classification  of 
service  and  rates  to  be  inadequate. 

Finally,  we  have  assumed  a  new  classification  of  service  and  a  schedule 
of  rates  adequate  to  net  a  return  of  8  per  cent  on  the  investment  and  plant 
and  business.  If  the  case  under  investigation  had  been  an  actual  instead 
of  a  hypothetical  one  it  would  but  remain  to  assemble  these  data  in  a 
clear,  concise  and  readily  assimilated  form,  and  to  present  them  before 
the  public  service  commission  under  whose  jurisdiction  the  company  oper- 
ates. 


CHAPTER  XXI 
TELEPHONE  APPRAISEMENT  BY  SHORT  METHODS 

396.  Appraisals  for  Purposes  Other  than  that  of  Regulation.  - 

Thus  far  in  this  series  of  articles  we  have  confined  ourselves  to  a  considera- 
tion of  the  various  methods  of  appraisement  which  may  be  used  in  the 
presentation  of  telephone  valuations  before  public  utilities  commissions. 
It  is  but  natural  that  appraisals  prepared  for  this  purpose  should  involve  a 
vast  amount  of  detail. 

Obviously,  telephone  appraisals  when  submitted  before  public  utility 
commissions  must  conform  strictly  to  the  commission's  requirements, 
and  their  appraisal  instructions  must  necessarily  demand  the  inclusion  of 
sufficient  detail  to  facilitate  a  ready  analysis  by  their  experts.  Unques- 
tionably appraisals  can  be  made,  with  a  remarkable  degree  of  accuracy, 
by  short-cut  methods.  However,  such  appraisals  are  not  readily  sus- 
ceptible to  substantiation  before  courts  and  commissions,  and  are  there- 
fore not  suitable  for  presentation  before  such  regulatory  bodies. 

There  are,  however,  other  uses  to  which  appraisals  are  put,  aside  from 
that  of  rate  regulation.  These  uses  may  be  summarized  as  follows :  — 

1.  The  appraisal  as  a  means  for  determining  a  proper  basis  of  capitali- 
zation. 

2.  The  appraisal  as  a  basis  for  determining  fair  value  in  the  event  of  a 
proposed  sale  of  the  property  under  consideration. 

3.  The  appraisal  as  a  basis  for  computing  depreciation  reserves. 

4.  The  appraisal  as  a  basis  for  financing. 

397.  Capitalization.  —  It  frequently  happens  that  the  capitalization 
of  a  telephone  company,  not  subservient  to  the  dictates  of  a  regulatory 
body,  does  not  in  any  way  represent  fair  value  of  the  company's  property 
and  business.    Whether  the  company  is  overcapitalized  or  undercapital- 
ized, such  a  state  of  affairs  is  likely  to  lead  to  undesirable  complications. 

The  time  is  not  far  distant  when  all  public  utility  companies  will  be 
subservient  to  some  form  of  commission  regulation.  Obviously,  a  company 
whose  capitalization  is  not  based  upon  a  determination  of  the  fair  value 
of  its  property  and  business  will,  in  the  event  of  the  establishment  of  a 
public  service  commission,  be  forced  to  adopt  rates  commensurate  with  its 
capitalization,  or  it  will  be  confronted  with  the  problem  of  explaining  to 
the  commission  any  discrepancy  between  the  value  of  the  property  as 
carried  on  the  books  and  the  value  as  determined  by  commission  ap- 
praisement. 


TELEPHONE  APPRAISEMENT  BY  SHORT  METHODS    223 

398.  Sale  of  Property.  —  When  a  telephone  company  is  considering 
either  the  sale  of  its  own  property  or  the  purchase  of  any  property,  both 
buyer  and  vendor  naturally  wish  to  know  the  monetary  value  as  determined 
by  appraisement. 

The  determination  of  such  value  must  be  predicated  upon  the  considera- 
tion of  two  equally  important  factors,  —  first,  reproduction  cost;  and 
second,  present  or  depreciated  value. 

399.  Depreciation  Reserves.  —  Another  use  to  which  the  appraisal 
is  frequently  put,  and  a  use  which  has  already  been  discussed  in  some  detail, 
is  in  connection  with  the  determination  of  reserve  funds.    It  is  hardly 
necessary  to  enlarge  upon  this  phase  of  appraisal  work,  in  view  of  the  dis- 
cussion presented  in  Chapter  XVII  on  depreciation. 

400.  Financing.  — •  When  a  telephone  company  applies  to  a  banking 
house  for  a  loan  on  its  property,  one  of  the  first  questions  to  be  considered 
is  the  value  of  the  property  as  determined  by  appraisal.    In  this  case,  and 
in  the  case  of  the  other  three  appraisal  uses  outlined  in  the  foregoing  para- 
graphs, unless  the  company  is  obligated  to  meet  requirements  imposed  by 
local  or  State  regulatory  bodies,  it  is  only  necessary  to  determine  a  reason- 
ably accurate  valuation  of  the  property.    The  company,  therefore,  will 
be  warranted  in  basing  its  valuation  upon  short-cut  appraisal  methods. 

Such  appraisals,  if  made  by  entirely  disinterested  outsiders,  are  rarely 
subject  to  question.  Bankers,  for  instance,  in  passing  upon  the  merits 
of  the  risk,  are  concerned  primarily  in  the  value  of  the  property,  and,  once 
assured  that  the  valuation  has  been  made  by  a  competent  and  disinterested 
expert,  they  are  not  likely  to  question  the  method  of  appraisement  or  be 
interested  in  detailed  inventories. 

401.  Various    Methods   of    Short-cut   Appraisement,  —  Several 
schemes  have  been  advanced  for  appraising  public  utility  properties  by 
short-cut  methods.     Electric  light  properties  are  sometimes  evaluated 
on  the  basis  of  the  cost  per  capita;  $20  to  $30  per  capita  will  give  some  idea 
of  the  value  of  a  three-phase  alternating  current  electric  light  plant  located 
in  a  town  of  from  5,000  to  10,000  population. 

The  value  of  common  battery  telephone  plants  may  be  determined 
approximately  by  applying  a  cost  per  station  of  from  $125  to  $200,  the 
exact  amount  to  be  used  in  a  specific  case  depending  upon  the  size  and 
individual  characteristics  of  the  plant  under  consideration.  Magneto 
telephone  plants,  situated  in  small  towns,  may  have  a  value  of  from  $50 
to  $100  a  station. 

If  the  plant  under  consideration  contains  only  a  small  amount  of  aerial 
cable  and  no  subway,  the  cost  of  the  physical  property  may  be  as  low  as  $50 
or  $60  per  station.  The  cost  per  station  varies  directly  with  the  amount  of 
cable  and  conduit. 

Another  approximate  method  of  determining  the  value  of  telephone 


224        TELEPHONE  RATES  AND  VALUES 

properties  is  based  upon  a  consideration  of  revenues,  expenses  and  net 
earnings. 

All  of  these  methods  of  approximate  valuation  are  obviously  extremely 
broadgauged,  and  are  suitable  for  use  where  only  a  very  rough  idea  is 
desired  of  the  value  of  the  property.  There  are,  however,  other  short-cut 
methods  of  appraisement  which  may  be  used  in  telephone  valuations  with 
the  assurance  that  the  results  will  represent  nearly  as  accurate  a  determina- 
tion of  property  values  as  if  the  appraisal  were  made  in  accordance  with 
the  more  detailed  methods  described  in  previous  chapters.  It  is  the 
purpose  of  this  chapter  to  outline  these  methods  and  to  show  how  they 
may  be  applied  to  specific  telephone  appraisal  problems. 

402.  Land.  —  A  reasonably  accurate  idea  of  the  value  of  land  used  for 
telephone  purposes  n^  be  had  by  determining  the  value  per  square  foot 
of  adjoining  and  equally  desirable  property,  and  applying  the  unit  cost 
thus  determined  to  the  land  under  appraisement. 

A  fair  value  per  square  foot  may  be  determined  by  consulting  records  of 
recent  real  estate  transfers  in  the  locality  in  which  the  land  under  considera- 
tion is  located,  and  by  consulting  local  real  estate  men  and  property  owners 
as  to  probable  land  values  at  the  time  of  the  appraisal. 

403.  Buildings.  —  The  most  prevalent  approximate  method  of  deter- 
mining building  values  is  by  what  is  known  as  the  cubic  foot  basis.    The 
cubical  contents  of  the  building  is  first  estimated  and  the  building  appraised 
at  a  unit  cost  per  cubic  foot,  this  cost  being  dependent  upon  the  size  and 
type  of  the  building  under  consideration.    Obviously,  a  different  cost  per 
cubic  foot  will  be  used  in  the  case  of  a  frame  building  than  would  be  used 
in  the  appraisement  of  a  modern  concrete  structure. 

Most  telephone  engineers  have  in  their  possession  reasonably  accurate 
figures  as  to  the  cost  per  cubic  foot  of  various  types  of  telephone  buildings. 
In  making  use  of  such  figures,  however,  every  effort  should  be  made  to 
determine  their  fairness  at  the  date  of  the  appraisal,  for  during  the  past 
two  or  three  years  building  costs  have  doubled,  and,  in  some  cases,  trebled. 

404.  Right  of  Way.  —  The  method  of  approximate  appraisement  of 
right  of  way  does  not  differ  radically  from  the  more  detailed  methods  dis- 
cussed in  previous  chapters.    A  right  of  way  unit  cost  per  pole  should  be 
determined,  and  this  cost  should  be  weighted  to  allow  for  the  relative  pro- 
portion of  the  total  number  of  poles  located  on  private  and  public  property, 
respectively. 

Perhaps  a  simpler  and  even  quicker  method  is  to  arrive  at  a  right  of 
way  cost  per  mile  of  pole  line,  making  due  allowance  for  the  location  of 
the  poles.  One  unit  cost  may  be  derived  for  city  poles  on  public  property, 
another  for  city  poles  on  private  property,  and  still  another  for  rural  and 
toll  poles. 

405.  Outside  Plant.  —  Numerous  methods  have  been  devised    for 
making  approximate  inventories  and  appraisals  of  a  telephone  com- 


TELEPHONE  APPRAISEMENT  BY  SHORT  METHODS    225 

pany's  outside  plant.  Most  of  these  methods,  however,  are  so  broad- 
gauged  that  unless  they  are  employed  by  one  who  has  had  a  good  deal  of 
appraisal  experience  they  are  not  likely  to  give  satisfactory  results. 

It  is  proposed  to  outline  briefly  several  of  the  more  approximate  methods, 
and  then  to  present  a  method  that  involves  more  detail,  but  will  result  in 
an  appraisement  compiled  in  an  orderly  manner  and  susceptible  to  subse- 
quent analysis. 

406.  Very  Approximate  Methods.  —  One  of  the  more  approximate 
methods  frequently  employed  is  to  determine  a  cost  per  station  for  the 
outside  plant,  weighting  this  cost  per  station  to  allow  for  the  relative 
amounts  of  underground  conduit,  aerial  cable  and  open  wire  construction 
as  found  in  the  plant.    Another  method  is  based  upon  a  preliminary  and 
necessarily  rapid  survey  of  a  portion  of  the  plant  under  appraisement, 
noting  the  average  number  of  poles  per  block,  the  average  number  of  cross 
arms  per  pole,  and  the  average  number  of  wires  per  cross  arm. 

With  these  data  as  a  basis  the  appraiser  can  take  a  map  of  the  plant, 
count  the  number  of  blocks  of  pole  line  and  thus  determine  the  total 
number  of  poles  and  cross  arms  and  the  total  length  of  wire.  Aerial 
cable  may  be  scaled  directly  from  the  map,  making  suitable  allowances 
for  terminals,  pole  seats,  etc.  Underground  conduit  and  underground  cable 
lengths  may  also  be  estimated  from  the  cable  maps  used  in  connection  with 
the  company's  subway  records. 

Still  another  method  that  may  be  used  for  approximate  appraisement  is 
based  on  an  actual  rapid  field  count  of  all  of  the  poles.  The  appraiser  may 
drive  over  the  plant  with  an  automobile,  following  the  main  pole  leads  and 
making  estimates  of  the  quantities  involved  in  branch  leads  from  observa- 
tions recorded  at  points  of  intersection  of  the  branch  and  main  leads. 

Numbers  of  poles  may  be  recorded  by  the  use  of  a  pole  or  peg  counter, 
no  attempt  being  made  to  classify  poles  by  height  or  size.  The  appraiser 
may  make  sufficient  sidenotes  as  to  the  average  height  of  pole  found  in 
the  plant  and  the  average  equipment  per  pole,  to  aid  in  subsequent  ap- 
praisement of  this  rough  inventory. 

Aerial  cable,  underground  cable  and  conduit  may  be  taken  directly 
from  the  records,  or  the  lengths  involved  may  be  estimated  approx- 
imately by  the  tachometer  of  the  automobile. 

407.  A  More  Accurate  Method.  —  All  of  these  methods,  as  previously 
suggested,  are  necessarily  very  broad-gauged  and  are  not  susceptible  to 
subsequent  analysis.    The  method  described  in  the  following  paragraphs, 
however,  is  a  sort  of  happy  medium  between  the  more  approximate 
methods  and  the  detail  method  described  in  previous  chapters. 

By  the  employment  of  this  method  an  appraisal  of  even  a  large  telephone 
property  may  be  effected  in  a  remarkably  short  time,  and,  while  the  re- 
sults will  not  be  in  sufficient  detail  to  warrant  their  presentation  before 
utility  commissions,  nevertheless  they  will  represent  a  reasonably  accurate 


226        TELEPHONE  RATES  AND  VALUES 

inventory  of  the  property,  and  will  serve  as  a  basis  for  the  determination 
of  a  reproduction  cost  which  will  probably  be  nearly  as  accurate  as  a 
reproduction  cost  determined  under  the  methods  outlined  in  previous 
chapters. 

This  method  permits  the  segregation  of  plant  according  to  the  major 
accounts  of  the  accounting  system  prescribed  by  the  Interstate  Commerce 
Commission  for  Classes  A  and  B  telephone  companies.  These  major 
accounts  for  the  outside  plant  are  as  follows :  — 

Exchange  Pole  Lines,  Account  24.1. 
Exchange  Aerial  Cable,  Account  242. 
Exchange  Aerial  Wire,  Account  243. 
Exchange  Underground  Conduits,  Account  244. 
Exchange  Underground  Cable,  Account  245. 
Exchange  Submarine  Cable,  Account  246. 
Toll  Pole  Lines,  Account  251. 
Toll  Aerial  Cable,  Account  252. 
Toll  Aerial  Wire,  Account  253. 
Toll  Underground  Conduit,  Account  254. 
Toll  Underground  Cable,  Account  255. 
Toll  Submarine  Cable,  Account  256. 

The  method  employed  for  inventorying  and  appraising  the  toll  plant  is 
identical  with  that  employed  for  the  exchange  plant,  and  our  present  dis- 
cussion will,  therefore,  be  confined  to  the  various  exchange  accounts. 
Toll  plant,  where  used  in  connection  with  exchange  plant,  may  be  readily 
identified,  and  so  designated  in  the  field  notes  that  it  may  subsequently 
be  segregated  from  the  exchange  plant. 

If  plant  is  used  for  both  exchange  and  toll  service,  the  determination 
of  its  classification  should  be  based  upon  whether  it  is  used  primarily  for 
exchange  or  toll  service.  This  point  has  been  discussed  in  some  detail  in 
previous  chapters,  but  to  refresh  the  reader's  mind,  the  following  simple 
illustration  is  given:  — 

A  pole  line  carries  five  full  arms  of  open  wire;  two  arms  are  devoted 
exclusively  to  exchange  service  and  two  arms  exclusively  to  toll  service, 
while  the  fifth  arm  has  four  exchange  circuits  and  one  toll  circuit.  There 
will  be  no  question  as  to  the  proper  classification  of  the  first  four  arms  or  of 
the  wire  on  these  arms. 

Cross  arms  1  and  2  are  used  exclusively  for  exchange  service,  and  there- 
fore both  cross  arms  and  wire  will  be  inventoried  under  the  corresponding 
exchange  accounts.  Cross  arms  3  and  4  are  used  exclusively  for  toll 
service,  and  the  arms  and  wire  will  be  relegated  to  the  proper  toll  accounts. 
Cross  arm  5,  however,  has  four  exchange  and  one  toll  circuit. 

The  four  exchange  circuits  will  be  inventoried  under  Account  243, 
Exchange  Aerial  Wire,  and  the  toll  circuit  under  Account  253,  Toll  Aerial 
Wire.  The  cross  arm,  however,  inasmuch  as  it  is  used  for  exchange  wire 


TELEPHONE  APPRAISEMENT  BY  SHORT  METHODS    227 

in  the  ratio  of  4  to  1,  will  be  classified  as  exchange  plant.  In  view  of  this 
classification  of  cross  arms,  the  pole  line  as  a  whole  may  be  said  to  carry 
three  exchange  cross  arms  (per  pole)  and  two  toll  cross  arms  (per  pole). 
The  poles,  therefore,  will  fall  under  the  exchange  category. 

408.  Exchange  Poles  and  Wire.  —  The  inventory  of  the  exchange 
poles  and  wire  may  be  effected  simultaneously  by  the  use  of  the  form 
presented  in  Fig.  65. 

The  exchange  pole  line  account,  it  will  be  remembered,  includes  poles, 
cross  arms,  pins,  brackets,  anchors  and  guys,  while  the  exchange  aerial 


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FIG.  65.  —  Form  for  pole  and  wire  plant  (inventory). 


wire  account  includes  line  wire  and  drop  wire.  The  form  shown  in  Fig. 
65  provides  separate  columns  for  entering  these  various  items,  but  it 
will  be  noted  that  the  items  are  grouped  in  such  a  manner  as  to  facilitate 
a  subsequent  segregation  of  accounts  241  and  243. 

This  form  should  be  used  in  conjunction  with  a  map.  Such  a  map  is 
shown  in  Fig.  66.  Identification  points  may  be  noted  on  the  map  and  also 
on  the  form.  To  illustrate:  The  appraiser  will  first  determine  a  run  of 
poles  of  convenient  size  to  be  recorded  on  one  line  of  the  form.  If  he  is 
starting  at  point  1  he  will  estimate  the  approximate  number  of  poles  that 
can  be  recorded  on  the  first  line  of  the  form,  and  place  the  numeral  2  after 
the  last  pole. 


228 


TELEPHONE  RATES  AND  VALUES 


Going  rapidly  over  the  line  from  1  to  2,  as  he  passes  each  pole  he  will 
note  the  equipment  in  the  proper  columns.  Poles  will  be  classified  accord- 
ing to  height  only;  cross  arms,  by  number  of  pins;  guys  and  anchors, 
according  to  average  size;  and  aerial  wire,  according  to  material  and 
insulation. 

Obviously,  to  make  intelligent  use  of  this  form  it  is  first  necessary  to 
make  certain  assumptions  as  to  the  proper  classification  of  plant.  Anchors, 


FIG.  66.  —  Key  map  for  inventory  sheet. 

for  instance,  are  divided  into  heavy  and  light  anchors.  Anchors  having  a 
wire  guy,  or  a  very  small  strand  guy,  will  be  classified  as  light  anchors, 
while  anchors  equipped  with  strand  over  a  certain  size  —  say,  |-inch  strand 
—  will  be  classified  as  heavy  anchors.  In  a  similar  manner  the  other  major 
classifications  of  plant  may  be  determined. 

409.  Inventory  of  the  Pole  Line.  —  Necessarily,  an  inventory  made 
under  the  plan  just  described  will  include  under  one  classification  plants 
of  widely  varying  cost.  The  inaccuracies  incurred  in  this  way,  however, 
may  be  largely  compensated  in  the  determination  of  the  unit  costs.  To 
illustrate:  35-foot  poles  are  grouped  together,  regardless  of  top  diameters. 
The  fact  that  there  is  a  wide  difference  between  the  cost  of  a  5-inch, 
35-foot,  and  an  8-inch  35-foot,  pole  may  be  taken  into  account  in  preparing 
the  unit  cost  used  for  appraising  the  inventory  of  35-foot  poles. 

In  connection  with  the  inventory,  the  appraiser  should  note,  at  least 
mentally,  the  predominating  top  diameters,  and  so  weight  the  unit  cost 
that  it  will  represent  average  conditions  as  found  in  the  plant. 

With  a  little  practice  and  with  the  aid  of  an  automobile  it  is  possible  to 
nventory  from  1,000  to  1,500  poles  a  day  by  using  a  form  similar  to  the 


TELEPHONE  APPRAISEMENT  BY  SHORT   METHODS    229 

one  presented  in  Fig.  65.  When  it  is  remembered  that  the  average  day's 
inventory,  if  made  under  the  more  detailed  methods  described  in  previous 
chapters,  will  rarely  exceed  400  or  500  poles,  the  advantage  of  the  method 
under  consideration  will  be  apparent. 

410.  Exchange  Aerial  Cable.  —  The  method  of  inventorying  the  aerial 
cable  plant  does  not  differ  radically  from  the  one  presented  in  the  earlier 
chapters  of  this  series.    However,  instead  of  actually  measuring 'the  cable 
in  the  field,  cable  lengths  may  be  scaled  from  the  map. 

From  the  company's  records  a  map  should  be  prepared  showing  the  lo- 
cation of  the  entire  aerial  cable  plant,  giving  gauges  and  sizes  of  cables, 
and  the  approximate  location  of  terminals  and  of  points  where  cables 
change  in  size.  Armed  with  such  a  map  the  man  who  makes  the  pole  and 
wire  inventory  can  check  the  cable  plant  in  conjunction  with  pole  inventory. 

An  experienced  field  man  will  have  no  difficulty  in  keeping  track  of  the 
cable  plant  while  he  is  recording  the  data  pertaining  to  the  poles  and  wire. 
By  stopping  occasionally  to  make  a  more  detailed  inspection  he  will  be 
able  to  verify  the  accuracy  of  the  cable  records,  and  to  note  any  changes 
upon  the  cable  map.  For  instance,  if  the  cable  map  shows  a  change  in  the 
size  of  a  service  cable  as  occurring  in  one  block,  and  the  field  inspector 
finds  that  the  change  actually  takes  place  in  the  next  block,  it  is  a  com- 
paratively simple  matter  to  make  the  necessary  corrections  on  the  field 
map,  and  the  subsequent  cable  lengths  as  determined  by  scaling  the  map 
record  will  be  reasonably  accurate. 

411.  Aerial  Cable  Unit  Costs.  —  The  unit  costs  used  in  appraising 
the  inventory  of  the  aerial  cable  plant  may  be  so  designed  as  to  offset 
inaccuracies  in  the  inventory  as  made  by  approximate  methods.     To 
illustrate :  In  taking  the  field  notes  a  good  deal  of  time  may  be  saved  by 
simply  counting  the  aerial  cable  terminals  and  entirely  disregarding  the 
sizes  and  types  of  terminals. 

Subsequently,  in  determining  the  unit  costs  it  may  be  possible  to  ascer- 
tain the  approximate  numbers  of  each  size  and  type  of  terminal,  —  either 
by  investigating  the  company's  records  or  by  talking  with  the  operating 
officials  who  are  in  a  position  to  know  the  details  of  the  plant's  construc- 
tion, —  and  to  so  weight  the  unit  costs  as  to  provide  for  average  condi- 
tions. 

It  is  possible  to  make  an  inventory  and  appraisement  of  an  aerial  cable 
plant  by  even  more  approximate  methods.  The  total  length  of  cable, 
regardless  of  size  or  gauge,  may  be  ascertained,  and  subsequently  from  the 
office  records  some  idea  may  be  obtained  as  to  the  average  size  and  pre- 
vailing gauge. 

A  unit  cost  may  therefore  be  computed  on  the  basis  of  this  average, 
and  this  unit  cost  when  applied  to  the  total  length  of  cable  will  give  a  very 
rough  approximation  of  the  value  of  the  cable  plant.  Terminals,  pole 


230        TELEPHONE  RATES  AND  VALUES 

seats  and  auxiliary  appurtenances  may  be  provided  for  by  an  allowance 
in  the  unit  cost. 

412.  Underground  Plant.  —  The  relative  value  of  the  underground 
plant  of  a  telephone  company  is  so  high  that,  as  a  general  thing,  it  does 
not  pay  to  adopt  methods  of  appraisement  which  are  too  approximate  in 
their  nature.    The  method  prescribed  herewith  does  not  differ  radically 
from  the  detailed  method  discussed  in  previous  chapters. 

A  form  similar  to  Fig.  18  presented  in  Chapter  IX  should  be  used. 

A  complete  record  of  the  underground  conduit  and  cable  plant  may  be 
transcribed  on  a  set  of  these  forms,  and  instead  of  making  a  new  inventory 
of  the  underground  plant,  the  data  as  thus  recorded  may  be  checked  in 
the  field.  However,  in  making  the  field  check,  all  unnecessary  detail 
should  be  eliminated.  It  is  sufficient  to  note  the  external  diameter  of  the 
cables,  which  will  serve  as  an  index  to  their  size  and  gauge,  the  number  of 
ducts,  the  duct  material  and  the  approximate  dimensions  of  the  manholes. 

Distances  between  manholes  may  be  determined  approximately  by 
pacing.  Lengths  of  lateral  ducts  and  lateral  cables  may  be  determined  by 
even  more  approximate  methods.  An  experienced  field  man  can  usually 
estimate  the  distance  between  a  manhole  and  a  lateral  pole  with  a  remark- 
able degree  of  accuracy  without  making  any  measurements  at  all. 

413.  Main  and  Lateral   Cable   Measurements.  —  The  size  and 
gauge  of  main  cables  may  be  determined  from  the  office  records,  and  lengths 
ascertained  by  reference  to  the  manhole  diagrams.    In  determining  main 
cable  lengths  adequate  allowance  should  be  made  for  the  lengths  of  cables 
within  the  manholes  themselves. 

Section  measurements  between  manholes  may  be  taken  from  center  to 
center  of  covers,  and  by  experimenting  with  one  or  two  manholes  an  aver- 
age allowance  may  be  determined  to  compensate  for  the  additional 
lengths  involved  in  running  the  cables  around  the  manhole  walls.  In  a 
similar  manner  the  proper  amount  to  be  deducted  from  center  to  center 
measurements  may  be  estimated  for  determining  the  duct  lengths. 

Lateral  cable  lengths  may  be  estimated  by  adding  to  the  lateral  conduit 
lengths  suitable  allowances  for  the  lengths  of  cable  on  poles  or  buildings 
and  in  manholes. 

414.  Block  Cable. — 'In  many  of  the  larger  cities — •  and,  for    that 
matter,  in  congested  commercial  districts  of  the  smaller  cities  —  special 
distribution  facilities  are  required.    In  city  blocks,  where  there  are  large 
numbers  of  subscribers,  it  is  obviously  out  of  the  question  to  attempt 
local  distribution  by  means  of  aerial  cables  located  on  streets  or  alleyways. 

Block  cable,  as  the  name  suggests,  is  subscribers'  distribution  cable 
located  within  the  boundaries  of  city  blocks.  Block  cables  may  be  placed 
along  rear  building  walls,  through  cellars,  or,  in  some  cases,  along  rear 
fences. 


TELEPHONE  APPRAISEMENT  BY   SHORT  METHODS    231 

Necessarily  the  inventory  and  appraisement  of  this  portion  of  the  cable 
plant  would  present  many  intricate  problems  if  an  attempt  were  made  to 
compile  a  detailed  inventory.  Usually  so  many  obstructions  are  encoun- 
tered within  city  blocks  that  it  is  almost  out  of  the  question  for  a  field 
inspector  to  follow  a  cable  run  throughout  its  entire  length,  unless  he 
devotes  much  more  time  to  this  phase  of  the  problem  than  is  warranted 
by  the  cost  of  the  plant  involved.  It  has  therefore  become  customary  to 
make  inventories  of  interior  block  systems  by  approximate  methods. 

The  following  is  a  plan  adopted  in  many  recent  appraisals,  and  one 
that  has  proven  very  satisfactory:  From  the  company's  records  the  total 
number  of  blocks  that  contain  interior  distribution  systems  is  first  ascer- 
tained. Next,  either  from  an  actual  inspection  of  a  limited  number  of 
blocks,  —  say  5  or  10  per  cent  of  the  total,  —  or  by  reference  to  the  com- 
pany's records,  a  detailed  reproduction  cost  estimate  is  made  of  the  aver- 
age value  per  block  of  the  interior  system  of  distribution.  In  determining 
this  average  an  effort  should  be  made  to  consider  typical  blocks. 

The  average  unit  cost  per  block,  as  thus  determined,  multiplied  by  the 
total  number  of  blocks  containing  the  interior  distribution  system,  will 
give  a  reasonably  accurate  estimate  of  the  total  reproduction  cost  of  the 
block  work.  The  average  cost  per  block  may  vary  from  $200  to  $1,000 
per  block,  depending  upon  the  individual  peculiarities  of  the  problem  under 
analysis. 

415.  House  Cables.  —  In  many  of  the  larger  buildings  it  is  necessary 
to  provide  individual  distribution  cable  facilities.    Such  cables  are  known 
as  house  cables.    Approximate  inventories  of  house  cable  systems  may 
usually  be  effected  by  consulting  the  office  records.    Most  companies  main- 
tain reasonably  accurate  records,  showing  the  approximate  location  of 
house  cable  terminals  and  the  sizes  of  cables  involved. 

Knowing  the  average  distances  between  building  floors  —  usually  12 
to  14  feet  —  it  is  obviously  a  simple  matter  to  obtain  sufficient  inventory 
data  for  an  approximate  appraisement  of  house  cable  systems. 

An  even  more  approximate  appraisement  of  house  cable  systems  may 
be  effected  by  determining  an  average  cost  per  building.  It  is  thought, 
however,  that  the  method  first  suggested  is  better.  In  fact,  it  does  not 
take  appreciably  longer  and  gives  a  much  more  accurate  result. 

416.  Other  Methods  of   Appraising   Underground   Plant. —  It 
will  be  remembered  that  both  house  and  block  cable,  as  defined  by  the 
accounting  instructions  of  the  Interstate   Commerce  Commission,  are 
a  part  of  the  underground  cable  plant.    The  methods  outlined  in  the  fore- 
going paragraphs  have  provided  for  the  segregation  of  the  items,  main 
conduit,  lateral  conduit,  main  underground  cable,  lateral  cable,  block  cable 
and  house  cable. 

If  only  a  very  rough  estimate  of  the  value  of  the  underground  plant  as  a 


232        TELEPHONE  RATES  AND  VALUES 

whole  is  desired,  the  following  plan  may  be  adopted:  First,  determine  the 
size,  gauge  and  total  length  of  each  main  underground  cable.  Price  the 
rough  inventory,  as  thus  determined,  by  using  a  unit  cost  per  foot  for  each 
cable,  which  includes  an  allowance  for  conduit  housing,  manhole  facilities, 
lateral  block  and  building  terminal  facilities. 

Obviously,  this  plan  may  be  used  only  by  one  who  is  thoroughly  familiar 
with  the  appraisement  of  underground  conduit  systems.  It  is  possible, 
however,  to  work  up  a  set  of  unit  costs  that  will  give  reasonably  accurate 
results. 

417.  Station  Equipment.  —  From  the  discussion  of  station  equip- 
ment, as  given  in  previous  chapters,  it  will  be  remembered  that  Account 
No.  230,  Station  Equipment,  is  made  up  of  the  following  sub-accounts:  — 

Station  Apparatus,  Account  No.  231. 
Station  Installations,  Account  No.  232. 
Interior  Block  Wire,  Account  No.  233. 
Private  Branch  Exchanges,  Account  No.  234. 
Booths,  Special  Fittings,  Account  No.  235. 

One  short-cut  method  of  appraising  subscribers'  station  equipment  is 
to  take  the  total  number  of  stations  from  the  company's  records,  and  to 
this  total  apply  a  unit  cost  that  will  include  not  only  an  allowance  for  the 
average  station  equipment,  but  also  an  additional  allowance  for  private 
branch  exchanges,  block  wiring,  and  booths  and  special  fittings. 

It  is  much  better,  however,  to  adhere  strictly  to  the  Interstate  Commerce 
Commission's  accounting  system  (for  Class  A  and  B  companies),  and  to 
make  a  rough  inventory  and  appraisement  of  equipment  falling  under  each 
of  the  five  subclassifications. 

418.  Station  Apparatus.  —  To  refresh  the  reader's  memory,  a  re- 
capitulation will  be  given  of  the  Interstate  Commerce  Commission's 
instructions  as  to  the  classification  of  station  apparatus.    The  station  ap- 
paratus account  should  include  the  cost  of  station  apparatus  proper,  such 
as  subscribers'  individual  telephone  sets,  inter-communicating  sets,  and 
private  branch  exchange  sets.    It  should  also  include  coin  boxes,  station 
protector  equipment  and  special  switching  devices,  such  as  cam  keys,  etc. 
This  account,  however,  does  not  include  any  of  the  station  wiring  or  the 
labor  of  placing  the  apparatus  just  enumerated. 

From  the  company's  records  it  is  possible  to  determine  the  total  number 
of  subscribers'  stations  of  all  classifications,  and  by  applying  to  this  total 
an  average  cost  per  station  a  reasonably  accurate  appraisement  may  be 
effected.  This  average  unit  cost  should  be  so  weighted  as  to  make  proper 
allowance  for  the  relative  numbers  of  wall  sets,  hotel  sets,  desk  sets,  and 
the  average  amount  of  auxiliary  equipment  as  found  throughout  the  plant. 

419.  Station  Installations.  —  The  Station  Installation  Account  in- 
cludes the  cost  of  labor  used  in  installing  the  station  apparatus  —  as  gpeci- 


TELEPHONE  APPRAISEMENT  BY  SHORT  METHODS    233 

fied  in  the  foregoing  paragraphs  —  and  both  material  and  labor  costs  for 
the  inside  wiring.  An  average  unit  cost  may  be  derived  that  will  include 
allowances  for  the  cost  of  placing  instruments  and  for  the  average  cost  of 
inside  wiring. 

Such  a  unit  cost,  when  applied  to  the  total  number  of  stations,  —  as 
determined  by  the  methods  suggested  in  the  foregoing  paragraphs,  —  will 
give  a  reasonably  accurate  idea  of  the  value  of  the  Station  Installation 
Account. 

420.  Interior  Block  Wires.  —  To  this  account  should  be  charged  the 
cost  of  interior  block  wires  from  the  point  of  entrance  to  subscribers' 
premises  —  where   a  connection  is   made  with  inside  wires  —  to   the 
point  of  connection  with  block  cable  terminals. 

The  plant  included  under  this  account  is  really  a  part  of  the  outside 
distribution  system,  but,  for  reasons  best  known  to  the  Interstate  Com- 
merce Commission,  it  has  been  included  in  its  accounting  instructions  as 
a  part  of  the  station  equipment. 

A  reasonably  accurate  appraisement  of  the  block  wire  equipment 
may  be  had  by  estimating  the  total  numbers  of  stations  located  within 
the  blocks  cared  for  by  interior  block  cable  systems,  and  applying  to  this 
block  inventory  an  average  unit  cost.  This  average  unit  cost  may  be 
determined  by  estimating  the  average  length  of  block  wire  per  station, 
and  making  due  allowance  for  the  auxiliary  equipment,  such  as  bridle 
rings,  long-saut  clamps,  etc. 

421.  Private  Branch  Exchanges.  —  To  appraise  the  private  branch 
exchange  equipment  by  approximate  methods,  it  is  only  necessary  to 
determine  the  total  number  of  P.  B.  X.'s  and  the  most  prevalent  size  and 
type.    Given  these  data,  the  method  of  appraisement  will  be  obvious. 

422.  Booths  and  Special  Fittings.  —  The  accounting  instructions 
of  the  Interstate  Commerce  Commission  prescribe  that  the  cost  of  booths 
and  special  fittings,  —  such  as  desks,  chairs,  fans,  cash  registers,  etc.,  — 
together  with  the  cost  of  installing  such  equipment,  shall  be  charged  to 
Account  No.  235,  Booths  and  Special  Fittings. 

The  appraisement  of  the  equipment  falling  under  this  account  may  be 
effected  by  the  method  suggested  in  the  foregoing  paragraph,  —  by  de- 
termining the  total  number  of  installations  and  a  unit  cost  representative 
of  the  average  equipment  and  installation  costs. 

423.  Central  Office  Equipment.  —  As  in  the  case  of  the  other  ele- 
ments of  a  telephone  company's  plant,  the  method  used  in  appraisement 
of  the  central  office  equipment  is  dependent  largely  upon  the  refinement 
of  detail  desired.    Other  things  being  equal,  it  is  always  best  to  adhere  to 
the  classification  of  equipment  prescribed  in  the  accounting  instructions 
of  the  Interstate  Commerce  Commission. 

To  review  briefly  the  portion  of  these  instructions  referring  to  the  central 


234  TELEPHONE  RATES  AND  VALUES 

office  plant,  Account  No.  220,  Central  Office  Equipment,  is  divided  into 
two  sub-accounts,  as  follows:  Central  Office  Telephone  Equipment, 
Account  221 ;  Other  Equipment  of  Central  Offices,  Account  222. 

424.  Central  Office  Telephone  Equipment.  —  This  account  includes 
the  cost  of  local  and  toll  switchboards,  chief  operators',  monitors'  and  su- 
pervisors' desks  and  tables,  wire  chiefs'  testing  outfits,  main  and  inter- 
mediate frames,  Central  office  cabling  and  wiring.    It  also  includes  such 
auxiliary  apparatus  as  call  registers  or  motors,  relay  and  coil  racks,  power 
plants,  —  including  rectifiers,  generators,  motors,  batteries,  power  switch- 
boards, motors  and  fuse  boards,  —  telegraph  instruments,  and  telephone 
substation  apparatus  when  used  exclusively  as  a  part  of  the  central  office 
equipment. 

A  very  rough  estimate  of  the  reproduction  cost  of  the  central  office 
equipment  may  be  had  by  first  determining  the  general  type  of  equipment, 
—  whether  magneto,  common  battery  or  automatic,  —  the  number  of 
stations,  and  then  applying  the  unit  cost  per  station.  Such  an  estimate  of 
reproduction  cost  is  necessarily  extremely  broad  gauge,  as  it  makes  no 
allowance  for  party  line  concentration  and  special  multiplying  features. 

A  better  way  is  to  determine  the  ultimate  capacity  of  the  board  in  lines 
and  its  present  equipment  in  lines,  and  then  work  out  a  unit  cost  per  line 
equipped.  In  deriving  such  a  unit  cost  the  capacity  feature  may  be  taken 
into  consideration  and  due  allowance  made  for  auxiliary  equipment,  such 
as  main  and  intermediate  frames,  power  plant,  etc. 

In  deriving  a  unit  cost  such  as  the  foregoing,  consideration  will  first  be 
given  to  the  general  type  of  switchboard,  whether  magneto  or  common 
battery.  Next,  the  type  and  make  of  board  will  be  investigated.  For 
instance,  a  certain  unit  cost  per  line,  with  slight  modifications,  is  applicable 
to  all  Western  Electric  Company  No.  10  boards.  Another  unit  cost  may 
be  found  for  Kellogg  common  battery  boards,  etc.  If  the  equipment  under 
appraisement  is  of  the  automatic  type,  a  unit  cost  per  Keith  unit  may  be 
applied,  or,  as  in  the  case  of  the  manual  switchboard,  a  unit  cost  per  line. 

425.  Unit  Costs  of  Appraisal  Engineers.  —  In  considering  this  sub- 
ject of  short-cut  methods  of  appraising  central  office  equipment,  the  reader 
must  not  gain  the  impression  that  appraisal  engineers  have  in  their  pos- 
session certain  definite  unit  costs,  worked  out  on  a  cost  per  line  basis, 
that  may  be  used  indiscriminately  in  all  cases.    As  a  matter  of  fact,  the 
appraisal  engineer  will  probably  have  certain  guiding  figures  in  mind,  and, 
when  confronted  with  a  specific  problem  involving  an  appraisement  by 
short-cut  methods,  he  will  use  these  figures  only  as  a  general  guide. 

The  unit  cost  to  be  used  in  the  case  in  hand  will  hi  all  probability  be  the 
subject  of  a  good  deal  of  thought,  even  if  only  an  approximate  valuation 
is  desired.  In  other  words,  the  appraisal  engineer  will  size  up  the  individual 
peculiarities  of  the  office  equipment  under  consideration,  and  the  unit  cost 


TELEPHONE  APPRAISEMENT  BY  SHORT  METHODS    235 

finally  used  will  be  the  result  of  many  trial  computations.  Among  other 
things,  the  appraisal  engineer  will  bear  in  mind  freight  and  installation 
costs,  the  amount  of  multiple,  if  the  board  be  of  the  manual  common 
battery  type,  and  the  general  nature  of  the  power  plant  equipment. 

If  the  plant  under  appraisement  is  a  comparatively  new  one,  which  is 
rarely  the  case,  it  may  be  possible  to  determine  an  extremely  accurate 
reproduction  cost  by  first  ascertaining  the  actual  cost  of  the  central  office 
equipment  as  shown  by  the  company's  books  or  the  manufacturers' 
records,  and  subsequently  making  due  allowance  for  changes  in  the  ma- 
terial and  labor  markets  between  the  time  the  board  is  installed  and  the 
time  of  appraisal. 

426.  Other  Equipment  of  Central  Offices.  —  This  account,  it  will 
be  remembered,  includes  all  of  the  auxiliary  central  office  equipment  other 
than  what  may  properly  be  classified  under  the  heading  of  "Telephone 
Central  Office  Equipment."    Desks,  chairs  and  all  other  office  furniture 
used  exclusively  by  the  operating  forces  will  fall  under  the  categonr  of 
"Other  Equipment  of  Central  Offices."    To  this  account  may  also  be 
charged  equipment  used  in  operators'  rest,  retiring  and  lunch  rooms. 

The  equipment  falling  under  account  222  may,  if  desired,  be  appraised 
on  a  cost  per  line  basis.  Usually  the  reproduction  cost  of  this  miscellaneous 
equipment  bears  a  more  or  less  fixed  ratio  to  the  cost  of  the  central  office 
equipment  proper.  However,  in  most  central  offices  the  amount  of  this 
auxiliary  and  miscellaneous  equipment  is  so  small  that  it  is  really  quicker, 
and  certainly  more  accurate,  to  take  a  rapid  inventory  and  appraise  this 
inventory  at  prevalent  market  prices  for  the  material  involved. 

427.  Omissions,  Purchasing  Expense  and  Tool  Expense.  —  All 
of  these  items  may  be  evaluated  by  approximate  methods,  —  by  determin- 
ing their  ratio  to  the  cost  of  the  inventoriable  property.    The  following 
ratios  —  expressed  in  per  cent  of  reproduction  cost  of  inventoriable 
property  —  will  be  found  conservative :  — 


ITEM. 

Percentage. 

Omissions  and  contingencies,  
Warehouse  and  purchasing  expense  
Tools  and  tool  expense, 

2  to    5 
2  to    6 
2  to    5 

Total  

6  to  16 

428.  General  Equipment.  —  The  general  equipment  of  a  telephone 
company  —  if  we  adopt  the  standard  prescribed  by  the  Interstate  Com- 
merce Commission  —  may  be  divided  into  five  classifications,  as  follows :  — 


236        TELEPHONE  RATES  AND  VALUES 

Office  furniture  and  fixtures. 

General  shop  equipment. 

General  store  equipment. 

General  stable  and  garage  equipment. 

General  tools  and  implements. 

In  appraising  the  general  equipment  by  short  methods  it  is  not  advisable 
to  attempt  to  make  a  segregation  of  these  five  subdivisions.  To  refresh 
the  reader's  mind,  however,  as  to  just  what  should  be  included  in  the  ap- 
praisal of  the  general  equipment,  the  accounting  instructions  of  the  Inter- 
state Commerce  Commission  will  be  briefly  reviewed. 

429.  Office  Furniture  and  Fixtures. —  Office  Furniture  and  Fix- 
tures, Account  261,  should  include  the  cost  of  all  desks,  tables,  chairs, 
filing  cases,  movable  partitions,  typewriters,  adding  machines  and  other 
office  devices,  when  such  equipment  is  used  in  connection  with  the  general 
administration  of  the  company's  affairs. 

It  will  be  remembered  that  all  furniture  and  fixtures  used  by  the  central 
office  and  operating  forces  should  be  inventoried  and  appraised  under  the 
heading,  "Other  Equipment  of  Central  Offices." 

430.  General  Shop  Equipment.  —  General  shop  equipment  should 
include  all  equipment  specially  provided  for  general  shops,  such  as  engines, 
generators  and  other  power  apparatus  used  in  operating  machinery,  — 
machine  tools,  shafting,  belts  and  auxiliary  shop  equipment. 

431.  General    Store    Equipment.  —  This   account   should  include 
all  of  the  equipment  of  storehouses  and  storerooms,  such  as  movable 
counters,  shelving  and  other  apparatus  and  appliances  used  in  handling 
and  storing  materials  and  supplies. 

432.  General  Stable  and  Garage  Equipment.  —  Under  the  classi- 
fication, " General  Stable  and  Garage  Equipment"  should  be  listed  auto- 
mobiles, trucks,  wagons,  horses,  harness  and  all  of  the  auxiliary  equipment 
necessary  to  their  upkeep. 

433.  General  Tools  and  Implements.  —  The  General  Tool  and 
Implement  Account  should  include  the  portable  testing  apparatus  and 
valuable  tools,  and  implements  devoted  to  the  maintenance  or  construc- 
tion of  the  telephone  plant  which  are  not  provided  for  in  equipment  ac- 
counts.   This,  however,  does  not  include  tools  carried  in  stock  until  such 
time  as  these  tools  are  issued  to  the  working  forces. 

434.  Appraisal  of  the  General  Equipment.  —  In  making  a  detailed 
appraisal  of  the  general  equipment  of  a  telephone  company  care  should 
be  exercised  not  to  include  items  of  small  value  or  short  life  which  have 
to  be  replaced  frequently.    The  cost  of  equipment  of  this  nature  is  really  a 
part  of  the  maintenance  expense,  and  for  this  reason  should  not  be  included 
under  the  capital  accounts. 

In  appraising  the  general  equipment  of  a  telephone  company  by  short 


TELEPHONE  APPRAISEMENT  BY  SHORT  METHODS    237 

methods  it  is  not  advisable  to  attempt  the  segregation  outlined  in  the  fore- 
going paragraphs.  There  are  several  ways  of  estimating  the  reproduction 
cost  of  the  general  equipment  without  going  into  detail. 

A  percentage  may  be  applied  to  the  sum  of  the  reproduction  costs  of  the 
items,  —  subscribers'  station  equipment,  central  office  equipment  and 
outside  plant.  Again,  it  is  possible  to  obtain  a  reasonably  accurate  esti- 
mate of  the  reproduction  cost  of  a  telephone  company's  general  equipment 
on  a  cost  per  station  basis.  The  exact  figure  to  be  used  will  necessarily 
be  dependent  upon  the  individual  peculiarities  of  the  case  under  considera- 
tion. For  a  small  company  of  from  2,500  to  3,500  stations,  the  cost  of 
general  equipment  may  range  from  75  cents  to  $1.50  a  station. 

435.  Materials  and  Supplies.  —  Under  the  heading  "Materials  and 
Supplies"  should  be  appraised  such  items  as  stationery,  fuel,  office  supplies 
and  tools  held  in  stock.    This  subdivision  of  the  appraisal  should  also  in- 
clude construction  and  maintenance  material  held  in  stock,  such  as  cable, 
conduit,  receiver  cords,  subscriber's  instruments,  etc. 

The  reproduction  cost  of  materials  and  supplies  may  be  estimated  by 
applying  a  percentage  to  the  sum  of  the  items,  —  central  office  equipment, 
subscribers'  station  equipment  and  outside  plant.  Perhaps  it  may  be 
obtained  a  little  more  accurately  on  the  basis  of  a  unit  cost  per  station. 

For  small  companies  having  from  2,500  to  3,500  subscribers'  stations,  a 
unit  cost  of  from  $1.50  to  $2.50  a  station  —  the  exact  amount  being  depend- 
ent upon  the  individual  peculiarities  of  the  case  under  consideration  — 
should  give  a  fairly  accurate  index  of  the  value  of  materials  and  supplies 
held  in  stock. 

436.  Collateral  Construction   Costs.  —  In  previous  chapters  the 
determination  of  the  collateral  construction  costs  has  been  discussed  in 
some  detail.    To  refresh  the  reader's  memory  it  may  be  said  that  the  col- 
lateral costs  involved  in  the  construction  of  a  telephone  property  are  those 
costs  which,  because  of  their  general  nature,  cannot  be  allocated  to  the 
unit  costs.    They  are,  however,  just  as  real  a  part  of  the  total  cost  of  build- 
ing a  telephone  property  as  are  the  items  of  direct  labor  and  material  cost 
as  included  in  the  units. 

The  collateral  costs  are  usually  considered  under  four  subdivisions,  as 
follows :  — 

1.  General  and  legal  expense  during  construction. 

2.  Engineering  and  general  supervision  during  construction. 

3.  Insurance  and  taxes  during  construction. 

4.  Interest  during  construction. 

437.  General  and  Legal  Expense  during  Construction.  —  In  the 
item  of  general  and  legal  expense  during  construction  should  be  included 
the  salaries  and  expenses  of  the  general  executives  of  the  company  involved 
in  the  construction  of  the  plant,  rentals  and  incidental  office  expenses 
incurred  by  these  administrative  forces,  and  retainers  paid  to  legal  counsel. 


238        TELEPHONE  RATES  AND  VALUES 

The  cost  of  general  administrative  and  legal  services  during  the  course 
of  construction  period  usually  ranges  from  2  to  6  per  cent  of  the  reproduc- 
tion cost  of  the  purely  physical  property,  or,  as  we  have  heretofore  termed 
it,  the  direct  construction  cost. 

438.  Engineering  and  General  Supervision.  —  The  cost  of  engineer- 
ing prior  to  and  during  the  construction  period,  and  the  cost  of  general 
supervision  while  the  construction  work  is  in  process,  is  a  very  real  element 
of  the  total  reproduction  cost  of  a  telephone  property. 

The  cost  of  engineering  is  usually  estimated  at  5  or  6  per  cent  of  the  total 
direct  construction  costs.  In  very  small  companies  the  engineer  often 
acts  as  a  general  supervisor  during  the  construction  period,  and  in  cases 
of  this  kind  the  foregoing  percentage  will  be  adequate  to  cover  both 
engineering  and  supervisory  costs. 

In  the  construction  of  larger  properties  it  is  necessary  to  maintain  both 
engineering  and  supervisory  forces  throughout  the  construction  period, 
and  the  cost  of  engineering  and  general  supervision  will  range  from  6  to 
9  per  cent  of  the  total  of  the  direct  construction  costs. 

439.  Taxes  and  Insurance  during  Construction.  —  While  a  tele- 
phone property  is  in  process  of  construction,  insurance  and  tax  charges 
are  bound  to  accrue.    The  land,  of  course,  will  be  taxed  from  the  moment 
it  becomes  the  property  of  the  company.    Buildings  and  construction  and 
equipment  material,  held  in  readiness  for  use  in  building  a  plant,  must  be 
insured. 

All  of  these  tax  and  insurance  expenses,  up  to  the  time  the  property 
begins  to  operate,  are  capital  rather  than  operating  charges.  Taxes  and 
insurance  during  construction  may  be  estimated  approximately  at  from 
3  to  5  per  cent  of  the  direct  construction  costs. 

440.  Interest   during   Construction.  —  Another   element   of   con- 
struction cost  which  cannot  well  be  allocated  to  the  units  is  the  interest  on 
moneys  used  in  constructing  a  telephone  property.   Interest  is  often  figured 
at  6  per  cent,  and  a  rough  estimate  of  the  cost  of  interest  may  be  had  by 
the  method  suggested  in  the  following  illustration:  — 

If  we  assume  that  the  direct  construction  costs  amount  to  $200,000; 
the  general  and  legal  expense,  $10,000;  engineering  and  general  supervi- 
sion, $16,000;  and  taxes  and  insurance,  $8,000,  the  total  amount  involved 
in  the  construction  of  the  plant  will  be  $234,000.  We  may  further  assume 
a  construction  period  of  two  years,  and  that  the  expenditures  are  so  appor- 
tioned that  the  average  investment  for  the  two-year  period  will  be  about 
50  per  cent  of  the  total  investment,  or,  in  this  case,  $117,000.  The  esti- 
mated cost  of  the  interest  would  therefore  be  6  per  cent  of  $117;000,  or 
about  $7,000. 

441.  Present  or  Depreciated  Value.  —  Approximate  appraisement 
methods  are  well  adapted  to  the  determination  of  the  present  or  depreciated 
value  of  a  telephone  property.    In  making  rough  estimates  of  the  present 


TELEPHONE  APPRAISEMENT  BY  SHORT  METHODS    239 

value  it  is  only  necessary  to  keep  in  mind  the  average  lives  of  the  various 
major  property  subdivisions,  such  as  buildings,  pole  plant,  wire  plant, 
aerial  cable  plant,  conduit  plant,  underground  cable  plant,  etc.;  their 
respective  salvage  values  and  ages  at  the  appraisal  date;  and  finally 
the  actual  condition  as  found  upon  inspection.  It  is  suggested  that  the 
reader  review  the  discussion  of  these  factors  as  given  in  Chapter  XVII  on 
depreciation. 

The  lives  of  some  of  the  elements  of  outside  plant  are  largely  dependent 
upon  local  conditions.  Cedar  poles,  for  instance,  have  a  longer  average 
life  in  some  localities  than  they  do  in  others.  Again,  iron  wire  will  have  its 
longest  life  in  dry  climates.  Other  items,  such  as  cable  and  conduit,  are 
not  affected  appreciably  by  local  conditions. 

The  average  life  of  central  office  equipment  is  largely  dependent  upon 
the  type  of  equipment  and  upon  functional  depreciation.  In  this  con- 
nection it  should  also  be  remembered  that  functional  depreciation  —  de- 
preciation resulting  from  inadequacy  and  obsolescence  —  is  a  very  real 
factor  in  the  determination  of  the  average  life  of  outside  plant. 

Proper  salvage  may  be  readily  computed  with  the  aid  of  such  tables  as 
those  presented  in  Chapter  XVIII  on  depreciation. 

The  ages  of  the  various  elements  of  the  plant  as  of  the  appraisal  date 
may  usually  be  determined  from  the  company's  records,  or  by  conference 
with  the  employees  who  have  been  with  the  company  a  long  time. 

The  actual  condition  of  the  plant  at  the  time  of  the  appraisal  should  be 
made  the  subject  of  a  most  careful  investigation  by  the  appraisal  engineer. 
This  is  one  of  the  most  important  factors  to  be  considered  in  the  deter- 
mination of  the  present  value  by  short  methods. 

In  connection  with  the  rapid  inventory  of  the  outside  and  inside  por- 
tions of  the  plant  by  the  methods  suggested  in  the  previous  installments 
of  this  chapter,  the  appraiser  should  make  frequent  and  copious  notes  as  to 
the  average  condition  of  the  various  major  elements  of  the  plant,  and  these 
notes  will  guide  him  largely  in  his  final  determination  of  present  value. 

The  items  of  collateral  cost  will,  of  course,  be  depreciated  at  the  same 
rate  as  the  direct  construction  costs.  In  other  words,  the  total  present 
value  of  the  items  of  direct  construction  cost,  divided  by  the  corresponding 
total  reproduction  cost,  will  give  a  percentage  which  may  be  used  in  depre- 
ciating the  collateral  elements. 

442.  Intangibles.  — •  Intangible  values  or  non-physical  assets  —  as 
they  may  perhaps  more  properly  be  termed  —  are  made  up  of  the  follow- 
ing items :  — 

Cost  of  franchises. 

Cost  of  establishing  business. 

Cost  of  financing. 

443.  Cost  of  Franchises.  —  The  franchise  cost  includes  all  of  the  ex- 
penditures actually  incurred  in  the  securing  of  a  company's  franchise.    An 


240        TELEPHONE  RATES  AND  VALUES 

estimate  of  their  cost  may  be  had  by  applying  a  percentage  to  the  reproduc- 
tion cost  of  the  physical  property,  including  both  direct  and  collateral  costs. 
The  amount  of  this  percentage  is  so  largely  dependent  upon  the  in- 
dividual peculiarities  of  the  property  under  appraisement  that  it  would 
be  most  unwise  to  attempt  to  quote  specific  figures.  Suffice  it  to  say  that 
an  experienced  appraisal  engineer,  after  carefully  reviewing  all  of  the  fac- 
tors which  may  have  any  bearing  on  this  phase  of  the  problem,  can  usually 
determine  a  percentage  which  will  be  sufficiently  accurate  for  approximate 
appraisal  purposes. 

444.  Cost  of  establishing  Business.  —  The  cost  of  establishing  busi- 
ness, or  going  value,  as  it  is  frequently  called,  has  been  defined  several 
times  in  this  series,  and  it  hardly  seems  necessary  to  repeat  the  definition  in 
the  present  chapter.    If  the  reader  has  any  doubt  as  to  the  meaning  of  this 
term,  it  is  suggested  that  he  review  the  definitions  given  in  Chapter  II. 

There  is  precedent  for  estimating  the  cost  of  establishing  business  at 
from  10  to  20  per  cent  of  the  reproduction  cost  of  the  physical  property. 
The  exact  percentage  to  be  used  in  a  specific  appraisement  will,  of  course, 
be  dependent  upon  the  emergencies  of  the  case  under  consideration. 

445.  Cost  of  Financing.  —  The  cost  of  financing,  or  "cost  of  enticing 
capital,"  as  it  is  sometimes  termed,  may  also  be  estimated  by  applying 
percentage  to  the  total  reproduction  cost  of  the  physical  property.    As 
in  the  case  of  the  item  " franchise  cost,"  the  percentage  to  be  used  will 
vary  widely  in  individual  cases,  and  it  is  difficult  to  prescribe  even  an  ap- 
proximate figure  for  general  use. 

Once  given  all  of  the  facts  relating  to  the  property  under  appraisement, 
the  appraisal  engineer  can,  however,  arrive  at  a  rough  figure  which  will 
serve  admirably  for  a  tentative  determination  of  financial  costs. 

446.  Conclusion.  —  In  concluding  this  chapter  on  short  appraisement 
methods  it  may  be  well  to  add  a  word  of  warning  as  to  the  determination 
of  the  various  units  and  percentages  used  in  making  short-cut  valuations. 
Approximate   appraisal  methods   are   necessarily   predicated  on  many 
assumptions,  both  in  making  the  inventory  and  its  subsequent  appraise- 
ment.     Obviously,  unless  these  are  well  taken,  the  resultant  appraisal 
will  not  afford  even  an  approximate  index  of  the  true  value  of  the  property. 

It  is  well,  therefore,  to  consider  each  phase  of  the  problem  most  carefully, 
and  to  be  certain  that  there  is  a  real  reason,  based  upon  sound  judgment, 
for  every  step  in  the  valuation.  Approximate  appraisals  should  not  be 
made  by  "rule  of  thumb"  or  "snap  judgment"  methods. 

All  of  the  facts  that  may  have  any  possible  bearing  upon  the  problem 
should  be  carefully  investigated  and  the  results  boiled  down  by  a  process 
of  elimination,  so  that  the  final  figures  as  used  in  the  appraisal  will  present 
a  reasonably  accurate  index  of  the  true  value  of  the  property,  despite  the 
fact  that  they  are  determined  by  approximate  methods. 


INDEX 


INDEX 


Accountant  and  appraisal  engineer,  156 
Accounting,  71 
Accounts  and  reports,  4 
Administration,  commercial,  207 
Advertising,  200 
Analysis,  216 

property  valuation,  216 
Anchors  and  guys,  120 
Apparatus,  station,  232 

subscribers'  station,  179 
Appraisal,  10,  28,  30,  67,  70,  222 
Appraisement,  104 

methods,  225 

short  cut,  223 
Appreciation,  104 
Assets,  non-physical,  23 

physical,  54 

Booths  and  fittings,  113,  233 
Buildings,  224 

appraisal  of,  111 

exchange,  176,  177 

Cables,  aerial,  125,  167,  229 

block,  99,  230 

block  interior,  142 

central  office,  143 

exchange  subsidiary,  169 

house,  143,  231 

lateral,  97 

lengths,  95 

measurements,  230 

salvage  value,  168 

salvage,  172 

sizes,  cost,  124 

submarine,  99,  171 

subsidiary,  142 

toll,  95 

underground,  98,  138,  168 

underground  exchange,  94 
Capital,  51 
Capitalization,  222 
Central  office  superintendence,  205 
Classification,  subscribers,  219 
Conduits,  annual  charges,  171 

construction,  135 

costs,  135 

exchange  composite,  171 

exchange  subsidiary,  170 

lateral,  95,  96,  97,  136 

main,  96 

main  underground,  169 


Construction  costs,  35 

engineering,  37 

expense  eetimate,  36 

general  expense,  36 

in  progress,  50 

reproductions,  51 

schedule  of,  38 

steps  in,  35 
Cost,  10 

ascertainment  of,  20 

collateral,  23,  53,  54 

collateral  construction,  237 

construction,  11 

direct  construction,  28,  29 

establishing  business,  240 

of  financing,  20,  240 

of  general  supervision,  37 

original,  12,  18 

reproduction,  18,  21 

theory  of,  21 

to  replace  new,  13 

unit,  13,  22 
Cross  arm  costs,  8 
Curves,  use  of,  107 

Deductions,  214 
Definitions,  appraisal,  8 
Depreciation,  15,  185 

actual,  157 

annual,  153,  163,  192 

cause,  15,  148 

definition,  149 

extraordinary,  152,  205 

importance,  149 

inadequacy,  15,  151 

in  appraisal  work,  153 

obsolescence,  15 

of  plant,  205 

percentages,  159,  183 

physical  decay,  15,  23,  151 

rate,  181 

reserves,  16,  153,  154,  155,  156,  184,  223 

sinking  fund,  24 

theoretical,  157 

wear  and  tear,  150 
Directory,  200 
Distribution  wires,  165 

Engineering,  238 
Equipment,  garage,  102,  236 

general,  101,  145,  235 

materials  and  supplies,  103 


244 


INDEX 


Equipment  —  Concluded. 

miscellaneous,  101 

office,  111,  112,  236 

shop,  102 

stable,  102,  236 

store,  102,  236 

tools,  103 
Estimated  life,  163 
Exchange,  private  branch,  113 
Expenses,  analysis,  215 

collection,  208 

commercial,  207-209 

directory,  208 

during  construction,  237 

general,  209 

legal,  237 

maintenance,  205 

non-operating,  211 

operating,  200 

pay  station,  207 

promotion,  191 

purchasing,  235 

traffic,  205 

Franchises,  cost  of,  239 
Furniture,  office,  101 

General  supervision,  238 
Good  will,  20 
Governmental  regulation,  2 

Income,  174 

Installations,  station,  112,  232 

subscribers'  stations,  179 
Insurance,  237 
Intangibles,  239 
Interest,  237 
Investment,  189 

Land,  224 

appraisal,  109 
appraising,  108 
appreciation,  173 
depreciation,  173 

Maintenance  supervision,  203 
Manholes,  137 

Materials  and  supplies,  145,  237 
Messenger  service,  199 
Messenger  strand,  199 

Net  earnings,  189 
Net  revenue,  188 

Obsolescence,  152 
Omissions,  235 

Plant,  underground,  230 
outside,  224 
toll,  180 


Poles  and  wire,  227 
exchange,  165 
line  appraisal,  114 
line  inventory,  228 
painting  cost,  118 
unit  cost,  114 

Prices,  material,  106,  13:5 

Property,  9 

inventoriable,  193 
sale  of,  223 
total  value,  193 


Rates,  basis  for,  17 

fair,  17 

investigation,  193 

making,  18,  186 

of  return,  192 
Regulation,  attempts,  2 

demand  for,  17 

governmental,  2 
Rents,  200 
Repairs,  classification,  200 

aerial,  203 

central  office,  204 

comparison  of,  220 

underground,  203 
Repaving,  137 
Reproduction  method,  13 

cost,  163 

Reserve  'fund,  163 
Revenues,  assumed,  218 

analysis,  217 

creation  of,  217 

insufficient,  216 

license,  200 

miscellaneous  exchange,  196 

miscellaneous  operating,  199 

net  operating,  213 

operating,  195 

pay  station,  196 

sub-accounts,  197 

subscribers'  station,  196 
Right  of  way,  173 

value,  145,  146,  147 


State  commissions,  history,  5 
Station  removals,  204 
Stepping  costs,  119 
Supervision  of  public  necessities,  1 

of  securities,  4 
Switchboards,  life,  178 


Taxes,  computation  of,  38,  39,  40 
during  construction,  238 

Telegraph  charges,  199 
commissions,  199 

Toll  line  revenues,  198 
messages,  197 


INDEX 


245 


Underground  terminal  equipment,  98 
Unit  costs,  105,  124,  147 

labor,  107 

of  appraisal,  234 
Utility,  8 

Valuation,  190 
Value,  9,  187 

depreciated,  238 

determination  of,  5 

fair,  10,  11 

going,  19 

intangible,  19 

of  contracts,  55 

physical,  11 


Value  —  Concluded. 

present,  16,  23,  25,  238 

rate-base,  26 

salvage,  14 

scrap,  30 

service,  14 

wearing,  14 
Valuing  real  estate,  190 

Wages,  operators,  200 
Wire,  exchange  bar* ,  166 

exchange  composite,  107 
interior  block,  133,  233 
rural  and  toll,  132 
salvage,  167 


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